Hilda Ochoa-Brillembourg doesn't miss a beat when asked to describe her philosophy of investing, and of living: “The world is full of opportunities, if you know how to measure the risks.” Her embrace of measured risks has taken her from a corporate and government consulting post in her native Venezuela to the helm of an Arlington, Va.-based investment outsourcing firm, where she measures risks like a master chef selects ingredients for a memorable meal.
After flirting with the idea of being a writer, and going to Harvard graduate school to perfect her English and knowledge of economics, Ms. Ochoa-Brillembourg returned to Venezuela to work at a state investment fund flush with petrodollars. That launched a lifelong interest in scenario analysis, which she took first to the World Bank, where she served as chief investment officer of the pension division from 1976 to 1987. Pension plans were not very glamorous at the time, but she found the experience uniquely helpful. Given the freedom to try new ideas, she had plenty, including diversification, beginning with hedge funds. She also saw the need to recognize distinct styles of money managers and to rank managers that way, which became a World Bank trademark.
Just two weeks after Black Monday 1987, Ms. Ochoa-Brillembourg took an even bigger risk, joining forces with five partners to launch Strategic Investment Group. On July 31, the firm recapitalized by selling a majority stake to private equity firm Friedman, Fleischer & Lowe.
How will the sale of the majority stake change your business? We've been in existence 25 years, and (the deal) was to help further the transition of ownership between the founding partners and the transitioning team. Nothing will change. FFL will be a supportive and intelligent financial partner, but will not have any role in our investment process.
What inspired you to start the firm? I am not impulsive. I was happy at the World Bank. They gave me freedom and respect. Five years into my job, (I developed) a process for identifying market efficiencies, and I thought, “This is something worth pursuing.” My initial business model was to develop a cooperative, like a common fund, with two or three sponsors, that would offer reduced fees and 50/50 split of profits between sponsors and staff. I met one of the founding partners of a leading investment bank at a conference, and he introduced me to a group of European banks interested in investing in U.S. investment managers, starting with a $300 million commitment. Our target clientele would be smaller, $50 million to $200 million, in need of sophisticated, sustainable investment staffing. The first surprise was $2.2 billion from the World Bank; the second was $500 million from a corporate pension fund.
Starting a firm right after the 1987 market crash did not feel reassuring, until we applied scenario analysis and realized the likely and best-case scenarios were quite good, despite how dismal things looked at the time. Corporate profits were strong and sponsors would have to add assets to their pension plans, interest rates had collapsed and individuals had not lost much wealth, given their low savings rates.
What was the climate for investment outsourcing 25 years ago? I believe we were the first firm that looked at all assets. People thought: Why do you need an orchestra leader if the musicians know all their parts? I had shown at the World Bank that you could add significant value by tilting the portfolio toward undervalued assets and management styles, and diversifying broadly and globally. At the bank, we were one of the first portfolios to really diversify globally. That helped us a lot with performance for many years.
How has it changed since then? Ten or 20 years ago, SEI and Russell began offering commingled, multimanager funds, and smaller investors wanted brand names. Now, outsourcing has become an industry, which is great, because with competitors, you can shine and you no longer have to prove the concept.
We distinguish ourselves by being highly quantitative but also highly experienced. The average longevity of our partners is 15 years. And now we are clearly a recognizable brand in the outsourcing space.
Where do you see investment opportunities in the next few years? It's always valuation-driven. It's a very schizophrenic market. Some investors fear recession or depression; others fear inflation. The middle outlook is nicely priced, so we're in the middle.
In a low-return environment like the current one, how do you calibrate your portfolio to not only survive but also thrive? Our typical equity portfolio is allocated roughly one-third emerging markets, one-third developed non-U.S., and one-third U.S. Depending on the client, 15% to 20% is in hedge funds, 15% to 20% is in fixed income for liquidity reasons, 3% to 5% is in real estate and 5% to 15% is in private equity. Every asset class can be moved 10% up or down. We are currently risk neutral at the policy level, roughly 9% to 10% total risk, with 8.5% beta risk and the rest active risk. We are underweight in government bonds and we've trimmed some emerging market equities. We use portable alpha, about 5% to 10% at the policy level. We are overweight in hedge funds and U.S. equities. We are believers that assets revert to drifting means over time.
When it comes to global markets, everyone is invested in the same markets, so how do investors best position themselves? We have various active levers: The way we distinguish ourselves is through small shifts in the asset mix. We wouldn't take more than 2% active beta risk and 2% to 3% active risk. An important lever is how we tilt within the asset class. Large-cap, high-quality growth stocks, for example, were orphaned after being overvalued in the late 1990s and have offered attractive returns relative to their risks. Another lever is the way we measure risk and the level of granularity we bring to measuring market mispricings and risks. Every bet of every manager makes it into a matrix. Typical risk metrics don't get to that level.
Strategic is a big believer in stress testing and scenario analysis. Where did that originate, and what do you think it gets you? We started in 1987 after the crash. The only way I knew, like I did with the Venezuelan surplus fund estimates, was to develop a wide range of scenarios, including widely positive and negative. The good news was that no one had any savings to lose. In 1987, the only savings were in pension funds. Stress testing disciplines the process. We know how bad it can get. We've shown that it is not just an art but a science. It's a great way to think. Most people are trying to prevent losses, but the big opportunities for great gains are when there are losses, and how you respond to those losses. Then you need liquidity, presence of mind, discipline and models. We've made most of our value-added after a market fall. We now have more thoughtful clients, more complex portfolios, and clients with multiple portfolios. We thrive on complexity.
This article originally appeared in the August 20, 2012 print issue as, "Measured approach".