Steven C. Huber spent 16 years in the money management industry — most recently at Aeltus Investment Management, where he was director of fixed income — before joining the $26.64 billion State Retirement and Pension System of Maryland as chief investment officer last September. A "quant" with a degree in mathematics and an MBA, Mr. Huber also is a chartered financial analyst and the first enrolled actuary in the Baltimore-based pension fund's top investment spot. He spoke with Pensions & Investments' Vineeta Anand about what he hopes to achieve at the Maryland fund.
Q What prompted you to leave money management to run a public pension fund?
A I had a very attractive opportunity to stay (at Aeltus), but I had been there 16 years and thought it was time for a change. ... I was looking at maybe going into something totally different — teaching, non-profit work — but the more time went by, I found out I really love investments. … I actually had several opportunities to get back into the private sector, but I had done that before. So I started thinking about endowments, foundations, public funds. And what's attractive to me about public funds is the opportunity to do public service. The processes are more extensive. You're dealing with many different groups with diverse interests — legislators, policy-makers, external money managers, consultants — and that's one of the interesting parts of the process. It gave me a chance to see things from a different perspective.
The income isn't that high and I had a lot more chances to make money in the private sector, but one of my previous mentors explained it to me that there's a lot of psychic income that comes from being in the public sector. Just in my two months here, I've found that to be the case.
Q What challenges do you face?
A There are a lot more groups you have to deal with, each with their own interests. In my former job, if I had an investment idea, I would go out and it would be executed within five minutes. Here I can't do that. There's a more extensive process. But I am very fortunate we have a very responsive board, a very action-oriented board, so that makes that process easier. The other challenge that I've found … is the challenge of time. There are so many constituents and a lot of demands on my time, and that has been the biggest adjustment, trying to juggle all those new roles. The other big challenge is the investment environment. I don't see a lot of sectors out there that provide a lot of value. You look at the traditional asset classes, equity and fixed income. Returns in those sectors I would not say are compelling at this time. We're looking to do a full asset allocation analysis and look at alternative asset classes and decide what to do there. We're looking for ways to increase return, but that's a challenge also.
Q Over what time frame are you hoping to do that?
A I just rolled out a new organizational structure … so that's starting immediately. It will take us, I'm sure, a few months to get through it. But it's going to take a look at our liability structure, how we're currently invested and how we want to allocate assets, with a particular focus on the alternative asset classes — private equity, hedge funds, other alternative asset classes — and come to some sort of decision as to what we want to target in those asset classes.
In general, I think those asset classes have a place in public funds. But we also want to go more slowly and take a measured approach to looking at the asset classes.
Q Didn't you increase your allocation to private equities just recently?
A We are 50% domestic equities, 15% international equities, 5% real estate, 30% fixed income. We do have a 2% target to private equities, which is included in that equity allocation. I don't want to speculate where we're going, but there are other public funds out there with much higher exposure to alternative assets.
Private equity has been through a tough period, especially venture capital the last three years. My view in general is you want to be in asset classes that have underperformed recently. My philosophy in general tends to be buy on fear, sell on greed. So it's a contrarian-type strategy. And if you look at what happened to private equity, we were in that greed phase in 1999-2000. There was a lot of money coming into the sector. It was the height of Nasdaq, and it was, in hindsight, the time to sell. If you look at it now, we've come out of that period. Markets are stabilizing, so I think it's a good time to take a closer look and increase exposure to private equity.
If you look at hedge funds, in 1990 there was something like $40 billion in total, and the way the market evolved was you had very smart people coming out of Wall Street who had extensive experience and for lifestyle reasons decided to start their own hedge funds. So it was a supply-driven market. You had a supply of hedge funds but did not have a lot of involvement from institutional investors and the returns were very high. The environment today is totally different. It's gone from being a supply driven market to a demand-driven market. Last year alone, the estimate I saw was $60 billion going into hedge funds and now the total size of the market is over $700 billion. That makes me nervous because when so much money is going into an asset class, it does a couple of things. It brings in perhaps less talented managers to be hedge fund managers. So the premium now is placed on being able to analyze those managers. There is more of a divergence of skill set among the managers, so it's crucial that you be able to do a fuller analysis of who is good and who is bad. The second thing is having access to the managers. All of the attractive funds are closed at this point. So in general, this is an asset class we want to go slowly in.
Q Have you made any changes in the investment staff?
A We are putting more of a focus on quantitative resources, quantitative strategy, risk management. Before, we managed a lot of the money internally. But now all of the money in equity and fixed income is externally managed. I think our role is more in that risk manager role. So we've set up a separate quantitative group. The role for that quantitative group will be looking at asset allocation (in conjunction with our general consultant, Ennis Knupp + Associates), performance measurement and attribution.
Q But aren't those traditionally roles of a consultant?
A Right. And that (group) will be working in a team approach with the consultant. And I think it's crucial we have a strong risk-management function. Markets don't fit cleanly with traditional statistical models. So we don't want to go to a strict modeling approach. There's a behavioral element also to markets. Markets tend to trade on emotions, but I think we want to have a quantitative group to model, and to provide us this data based on historical analysis.
Q What's the payoff?
A The way we're approaching this is that our job is not to outperform asset benchmarks. Our job is to protect and grow surplus. So we're going to be very oriented toward managing toward surplus targets. The implications are a dual focus on both the investment side and the liability side, the investment side being more the return portion and the liability side being more the risk portion. So the quantitative side will be looking to enhance returns but also do it in a risk-controlled fashion.
