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Surviving turmoil: Face to face with Mansco Perry III

Maryland's CIO talks about the economy and how his fund started an allocation shift just as the financial crisis started to unfold

Mansco Perry III's first two years as chief investment officer for a major public pension fund have been a roller-coaster ride.

Just before he stepped in as the CIO of the Maryland State Retirement and Pension System, Baltimore, in April 2008, the fund had total assets of $37 billion. By February 2009, the fund's assets had plummeted to less than $24 billion, leaving Mr. Perry — who previously served an 18-year stint at the $54.6 billion Minnesota State Board of Investment, St. Paul — scrambling for cash to make sure the fund could continue making benefit payments.

With the economy at least partially in recovery, total assets have grown to $33.7 billion as of March 31, and Mr. Perry, a 57-year-old lawyer and public pension plan veteran, shared some of his insights on the economy and running a pension plan during turbulent times.

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Mansco Perry III

  • Current position: Chief investment officer, Maryland State Retirement and Pension System, Baltimore
  • Assets: $33.7 billion as of March 31
  • Age: 57
  • Education: B.A., Carleton College; MBA, University of Chicago; J.D., William Mitchell College of Law
  • Professional credentials: Chartered Financial Analyst; Chartered Alternative Investment Analyst, level II candidate
  • Personal: Married, two children
  • Interests: Numismatics; collecting sports memorabilia; golf and baseball (“I am a big baseball fan, and I am an obnoxious New York Yankees fan,” Mr. Perry said.)
  • Investment performance (as of March 31)
    • Fiscal year to date: 20.43%
    • 1 year: 34.6%
    • 3 years: -1.75% (annualized)
    • 10 years: 2.49% (annualized)
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What were you thinking during the May 6 “flash crash,” when the Dow Jones industrial average dropped more than 900 points? My first thought was: Oh, my, gosh, deja vu all over again. I think if we didn't have the rebound that we did in the latter part of the day there would have been a few somber faces. But there was no panic here. It was just more a matter of concern. Part of me believes that some of us have become a little bit immune to some of the volatility we're experiencing on particular days, and I don't know if that's good or bad.

What do you think caused the flash crash? My concern is we may never really know. The regulators will obviously investigate the trading. I think we will get an answer, but I'm not sure it's one that I would put a lot of credence in.

Why is that? I guess I've become a little cynical in my old age. After what's gone on the last couple of years, there's going to be pressure to come up with answers.

So you think the government may not be able to figure it out or they might misreport it? I'm not sure I'm going to believe it if we hear something real quick. The good thing about technology is we are able do things very quickly. There could have been mistakes. There could have been people who just started reacting to what was going on. Because there was this downturn, I tend to think that now we're going to see more feeding frenzies. One thing I would not rule out is cyberterrorism. I am not saying that to panic anyone or to cast aspersions. It's just that we are living in an age where technology is very much a part of markets. There are a lot of people who are really upset. So I just look at that and say, while I think there's a low probability, I wouldn't discount it out of hand.

Do you think the economy has moved out of the real problem area? What I have been focusing on mostly is the unemployment number. Even if we have the so-called jobless recovery, I have difficulty understanding how we're going to have a well-functioning economy if we've got 10% sustainable unemployment. Maybe I'm old-fashioned, but until we get unemployment down to more normal levels like 6% or so, I'm having difficulty saying that things have clearly turned.

Do you think the government's financial reform efforts are going to prevent additional economic collapses? Honestly, no. I think we have some very well-intentioned people. But I get concerned that we may have unintended consequences. I think we do need regulation. I just hope we don't go overboard and severely hamper free markets.

What would you propose the government do? Well, it appears that the regulations are going to come about because of some well-intentioned congressional staff members.

I would probably set up a commission — obviously it would have to be bipartisan. But I think we need to have some knowledgeable people actually sit down and try to understand how things need to be fixed — both regulators and market participants.

I don't see an easy fix. My fear is that there is just such a sense that we have to punish (someone), and until we get past that stage, I'm a little concerned about what the rules will be.

You started as Maryland's CIO in April 2008, just as the economic downturn was starting. How did you react? The reaction was to survive. We actually approved (a dramatically new) asset allocation on the Friday before Lehman (Brothers Holdings Inc.) fell. From that point forward, there was turmoil through most of the remainder of September. And then during October, it seemed like the stock market went down almost every day during the month. I was concerned that I might not be able to pay benefits, so we started thinking about liquidity and started raising cash wherever we could. We got up to a 10% cash level and stayed there through most of the winter.

When did you first realize that the market really was in serious trouble? In October. There was just no good news out there. We never panicked. I guess I always thought that part of my responsibility as CIO was to try to be patient and prudent and calm and not to panic.

Maryland's policy targets have changed dramatically. You cut public equity to 36% from 65%; halved fixed income to 15%; doubled real estate to 10%; and added allocations to credit/debt strategies, real return, absolute return and private equity. Was the change your doing? When I got here, there had already been some inroads into changing from a more traditional, very heavy focus on public equities. I have been a big proponent of private equity.

I would say that the asset allocation that we ultimately recommended to the board back in September of 2008 was a collaborative effort between me and our general consultant, Suzanne Bernard, a principal of Ennis Knupp. What we ultimately came up with I think is something we are both proud of.

We really didn't have any discussion about changing our asset allocation during all the turmoil. We set it in 2008, and we did a few minor tweaks to it. But for the most part, this is where we believe we ought to focus for the long term.

And the reason for that? One of the primary reasons for it is greater diversification and the hope that we'll have less volatility than we would if we were 65% reliant on public equities.

Where does the system need to go in the future? We're not looking at any major changes. We're holding pretty steadfast to the targets. But despite the fact that we've got a target asset allocation for public equities of 36%, we're still at about 53% or 54%, and I would anticipate that it would be five or so years before we get closer to the target.

Is the heavy lifting really done now? I think the heavy lifting has been done. We've got a design, and we're proceeding on implementing a portfolio to reflect our asset allocation.

What's next for you professionally? I like doing this type of work. This is a great opportunity. But since I accepted this job ... the world has changed dramatically and I've made significant personal sacrifices. I anticipate that when both the economy and the political environment return to normal I'll be able to make decisions (about the future) with greater clarity.

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