Virginia Retirement System's new CIO Schmitz sought a change of scenery
Virginia Retirement System's new CIO brings an interest in sophisticated investing — and American history — all the way from Oregon
Ronald D. Schmitz, the new chief investment officer of the $51 billion Virginia Retirement System, liked his old job as CIO of the $57 billion Oregon Public Employees Retirement Fund. But as he and his wife faced the prospect of an empty nest, they decided it was the perfect time for a change of scenery. Along with a lot more days of sunshine and a new part of the country that offers plenty of diversions for a couple of American history buffs, Mr. Schmitz is also enjoying a different approach to investing at VRS.
Snapshot
David Stover
Ronald D. Schmitz
- Current position: Chief investment officer, Virginia Retirement System, Richmond
- Assets: $51 billion as of Sept. 30.
- Age: 58
- Education: B.A., Western Illinois University; MBA, Northwestern University
- Personal: Married, two children
- Interests: Travel, American history
Until November 2011, Mr. Schmitz served as CIO of the Salem-based Oregon fund, where he also handled investments for a $3 billion accident insurance fund and a $12 billion cash management account, since 2003. Before that, he spent four years as CIO for the $11.1 billion Illinois State Board of Investment, Chicago.
Mr. Schmitz got his start in fund management with Kraft Foods Inc. in 1982 and later gained pension management experience with Sears, Roebuck & Co. He also served as director of investments for Blue Cross & Blue Shield Association from 1988 to 1998. After growing up in St. Louis and Chicago, he got an accounting degree from Western Illinois University. But “within six months,” he says, “I knew I didn't want to do that forever,” so he went back to school, earning an MBA from Northwestern University, and he's never looked back. “Investments are just more interesting and exciting. It's always changing.”
What attracted you about this particular job? A colleague said that it is one of the best funds in the country, and suggested that I take a look. There are lots of very sophisticated portfolios here. There is a lot of conversation. Some people don't want that, but I say, what a benefit. I wish I had had that when I got to Oregon.
What are the similarities between Oregon and Virginia? The overall investment philosophy is very similar. Oregon has a bit more public equity and much more international management. Here, there is a lot more attention paid to current market conditions.
What are the differences? One microcosm of the difference is how they handled the recession. Here, they are trying to catch a lot of smaller opportunities, which means that they make a lot of smaller shifts more frequently. That showed a couple of things: that they can make tactical moves, and — I have to give Virginia credit — they work the assets here really hard. I am amazed at the amount of information that flows across the desks of the investing staff here.
What has been your biggest challenge at VRS? One of a CIO's biggest challenges is effective board relations. This board is more hands-on at the staff level, but much more is delegated to the staff. I think it's a much smarter governance model. Staff spends the time getting to know managers, and you can make informed decisions. It just seemed to me a smoother way to operate.
How do you see VRS changing? In 2010, the board shifted from 70/30 (equities/fixed income) to 60/40. In 2012, they will revisit the allocation. Right now, about 25% of assets are managed internally. I think there is a general desire to do more of that.
Your tenure at Oregon seemed to represent a preference for active management. How do you see it playing out at Virginia? When I started in Oregon we went through the portfolio strategies by asset class. I do believe that the international markets are less efficient than the U.S., and thus, one could win with active management. I was a big believer in enhanced indexing vs. pure passive. So we eliminated the international index and carved out some pure U.S. passive. Beyond that, the basic strategy evolved a bit, but remained tilted toward active approaches. In 2010, we went through a pretty exhaustive review of the passive/active question. In the end, we were able to show that we had added value to the index, partially because of a small-cap tilt and partially because we had superior manager and security selection.
It is too early to tell what may happen here. The team at VRS is very strong in equities as well as the other asset classes. But the proof of the pudding is whether the active portfolio is outperforming a passive benchmark net of fees. If so, why would you not be active vs. indexed?
One innovation at Oregon was the internally managed equity index program. I was influenced tremendously in the early "80s by having been involved in a small internal equity portfolio when at Kraft Foods. We ran a paper portfolio for a year that followed some buy/sell rules that I had worked on as part of an investment class in graduate school. Both performed well so I thought I was on to something.
After an organizational review in 2004, we noticed that Oregon was in the minority among large public funds in that it did not have internal management. We adopted a long-range strategic plan to explore internal management. As I thought about the plan, I realized that it just did not make sense to try and replicate a Wall Street-type fundamental approach with reams of highly paid analysts.
At the same time, the advancements in technology and risk-control methods made an index-plus and/or enhanced index approach a possibility. We were fortunate to attract an experienced portfolio manager to Oregon and the internal portfolio was born.
Oregon was the first investor in KKR, and since then has been a big investor in private equity funds. How has that changed the way public funds look at alternatives? I suppose the very fact that a respected public fund made such an investment lent legitimacy to private equity. More importantly, the initial investment was hugely successful. Oregon's love affair with the asset class started with that 1980-era investment in a local retailer that generated something like a six-times multiple, and the KKR relationship simply grew from there. Before long, other funds started asking about what Oregon was doing and how it was doing it.
Oregon also paved the way by setting guidelines for private equity (Private Equity Principles since adopted by the Institutional Limited Partners Association). There was a twofold genesis to the idea. The OIC (Oregon Investment Council, which oversee Oregon PERF) and staff were increasingly frustrated that the alignment of interests with GPs were being diluted by the fact that GPs were starting to become publicly held and that the growth in fund size did not result in a material decline in fees. Hence, LP interests were now competing with shareholder interests and the GPs were getting rich off of fees and not just profits.
We became aware that the ILPA was working on a guidelines for private equity investors — PREA (Pension Real Estate Association) was working on something similar for real estate investing; investors were going through a similar exercise for hedge fund investing. We were fortunate to get our hands on those three draft documents and took bits and pieces from all three sources. The fact that Oregon got there first was simply a matter of us acting on our own rather than going through a group process, which is naturally slower.
Are you experiencing the famed Southern hospitality? There is a gentility here that is really nice. I have not explored as much as I would like, but there is such geographic beauty here and such history, that I am looking forward to getting out and about. I look forward to exploring battlefields and museums dedicated to the War of Northern Aggression. n
— Contact Hazel Bradford at hbradford@pionline.com
Reader Comments
Share your thoughts below. Reader comments are subject to moderation.