David Zellner found his job as chief investment officer of the General Board of Pension and Health Benefits of the United Methodist Church in 1997 through a classified ad in Pensions & Investments.
His employer at the time, Investment Research Co., was moving to San Diego from Chicago. Mr. Zellner, who was chief operating officer, was reluctant to move his young daughters, who had just started a new school year. The United Methodist Church job was a perfect fit: Prior to Investment Research Co., he cut his teeth managing pension fund assets from 1987 to 1994 for Shell Oil Co. at its Houston headquarters, ultimately becoming director, equity investments.
In 2011, the UMC pension organization spun its investment management operations into a new division, Wespath Investment Management, which Mr. Zellner heads. The creation of Wespath was a “rebranding” exercise, he acknowledged. Over the years, church entities had come to the board seeking to invest various asset pools in the six manager-of-managers funds that are the building blocks of the church's defined benefit and defined contribution plans.
Now, 11% of Wespath's $18.3 billion assets are managed for external United Methodist Church bodies, a figure Mr. Zellner and his team hope will increase over time to include non-Methodist faith- and values-based investors. The funds all are managed using environmental, social and governance principles that are inherent in the teachings of the church's founder, John Wesley. “Many United Methodist entities recognize that Wespath is connected with John Wesley,” Mr. Zellner said.
How did you get into pension fund management? My MBA is in finance, but the first 10 years of my career were at Shell Oil, where I did a variety of things mostly related to accounting, systems development and supporting our operations side. It wasn't until I was there for 10 years that I was transferred into the pension fund (department) and actually got to invest.
Shell had a management training program where they rotated you around to different departments. They called it “getting your card punched.” They wanted me to get my card punched with Treasury experience and told me it would be a two- to three-year assignment. After two years, I said that I was happy in the pension part of Treasury and if they were happy with me, I would like to stay there and throw the card away. I was there for seven years.
Please describe the board's retirement plans. We definitely have a unique structure. We had a pure defined benefit plan up until the end of 1981. Then we put in a hybrid plan from 1982 to 2006. It is a defined contribution structure during the accumulation years and when you retire, it converts to a defined benefit plan.
Then in 2007, we adopted another hybrid plan, but it's a more traditional hybrid plan in that your employer makes a contribution that goes into a traditional defined benefit plan component and your employer makes (another) contribution that goes into a traditional defined contribution component.
Is the investment structure the same for all of these plans? I like to describe the organization as two separate companies: There's the liability management company and the fund management company.
The liability management company looks at every one of our liabilities: the large and small defined benefit plans; the defined contribution plan where every one of the 50,000 participants represents a liability; and our institutional accounts such as endowments and foundations, operating funds, and health and welfare funds.
Then the fund management company is a typical mutual fund company. We have a suite of (manager-of-managers) funds and in managing each one of the liabilities, we create an asset allocation from among the six available funds to best match the liability.
We don't offer target-date funds in the defined contribution plan because we don't believe that one size fits all. Because the challenge for participants is to manage their assets to retirement and then through retirement, we offer the LifeStage Investment Management Service, which provides a customized asset allocation and auto-rebalancing. About 60% of our participants are “passive” investors and are enrolled in this program.
In December, we are rolling out a new service, the LifeStage Retirement Income program, that will determine optimal distribution of assets after retirement that is adjusted annually in response to market conditions and lifestyle changes.
Where do Wespath's social investment tenets come from? The marching orders for our agency come from a document known as The Book of Discipline.
The passage from the Book of Discipline that describes our charge says we are “to discharge our fiduciary duty solely in the interests of the participants and beneficiaries using care, skill prudence and discipline.” It's basically a prudent person standard.
As far as social principles are concerned, the Book of Discipline asks that “United Methodist boards and agencies make a conscious effort to invest in institutions, companies, corporations or funds whose practices are consistent with the goals outlined in the (church's) social principles.”
Social investing is not a mandate: It is an aspiration.
We take that aspiration very seriously. Our whole team is dedicated to finding ways to incorporate the social principles into our investments. We are not required to screen our portfolios; we have voluntarily chosen to do so. Where we think a screen would have an adverse effect on performance, then we don't screen.
We incorporate the three pillars of social investing — screening, social impact and advocacy — and are very active in all three areas.
What are some areas where screening would be detrimental? There are a couple of places where we don't screen. The most notable place is in our emerging markets portfolios, where there are some countries where it is too difficult to access the market through a separate account structure. So we end up using managers that have pooled structures and we can't apply our screening process. There are some private equity funds where we talk to the manager beforehand to get an assessment of the extent to which he or she will invest in prohibited industries. If the investment is massive, we will avoid the fund, but if the investments in prohibited industries are small, opportunistic portions, we will go ahead and invest.
Are you a Methodist yourself? No. What's interesting about the Methodist connection is that I will get into conversations with people who have been lifelong United Methodists and I'll start explaining certain things about the church and they'll say “I didn't know that.” They assume that I am a Methodist by virtue of the fact that I have been here for 15 years.
I do read a lot about what's going on in the church that is completely unrelated to investing. I think it's an important part of the job to understand your employer. n
This article originally appeared in the October 1, 2012 print issue as, "No place like home".