Pure Exposure: Face to Face with Scott C. Evans

TIAA-CREF, a multiasset product firm, ranked 12th in total assets under management in P&I's annual directory of money managers. Scott C. Evans became its executive vice president-investments and chief investment officer March 18. He's responsible for investment policy, strategy and oversight for its $324 billion under management. Mr. Evans joined TIAA-CREF in 1985 as an investment analyst and in 1994 became the first portfolio manager for the CREF Growth Account. Barry B. Burr interviewed him on TIAA-CREF's investment policy, operations and product development.

A Quite honestly, it's not terribly relevant to our participants in their long-term objective to save for retirement. The markets go up and down every day due to all kinds of crosscurrents. We focus primarily to see that our participants have a full spectrum of investment resources. That is a disciplined process that doesn't have much to do with forecasting short-term macroeconomic events.

A Basically, I'm responsible for investment policy. In terms of day-to-day management, you don't want to have a bureaucratic process where someone who finds a mispricing in the market has to get multilevels of approval to take action. … So you have to structure your active investing vehicles to allow decision-makers who are on the front lines to make those decisions as quickly and appropriately as needed. That being said, we have a well-designed senior management structure that oversees the risks being taken, that sets the guardrails, if you will, for these decision-makers to make sure the risks they take don't exceed a preordained structure. We have a lot of controls in place but those controls don't involve gumming up the decision-making process and harming our participants' economic opportunity. I'm a big believer in a decentralized decision-making structure with a very carefully centralized control process.

A All of our products have certain common characteristics. They are pure exposure to the asset class. You get exactly what you bargain for. There is no style drift; there is no drift between asset classes. They are fully invested in the investible universe they've been assigned to, broadly diversified across that universe. … (W)e don't let managers goof around with the cash position. They can't run up cash because they can't find anything to invest in or they think the market is going to go down. They focus most of their time on stock selection. We have a large group of analysts. We look at fundamentals. We try to find stocks that are priced out of sync with fundamental value. When we invest in fixed income we do very much the same thing. The duration of the portfolio looks very much like the duration of the investible universe. We aren't trying to market time; we aren't trying to forecast interest rates. What we are trying to do is to find bonds or sectors in the market that are out of sync with what we assess are their fundamental values. So all of our funds are going to stay close to the investible universe to which they are assigned. They stay close to the benchmarks. Their behavior won't be that different from our index funds. Some people call that closet indexing. I call it pure exposure to the asset class and a disciplined approach to active investing. If that's closet indexing, I'm unapologetic about it. Because I think it's the most effective way to add value to a participant's holdings over time.

A The interactions with companies on corporate governance are handled by different people than the interactions on investments. ... Corporate governance efforts are rarely directed at a single company but at a practice that exists that we think needs to be changed. So we don't want to get into an antagonistic situation with our investment people who are working with a company trying to understand its strategy.

A Can you make money on corporate governance? … There is a lot of noise around the research that has been done. It's difficult to quantify. You know in your heart when you see a company do things that are clearly harming shareholder interest that your economic interests are going to be best served by advising against that. But to the extent you can do some sort of screen to this and add value, it is not integrated into our investment approach … Specific corporate governance behavior of companies is very much on the radar screen of our analysts.

A Increasingly over time we have made the pay of portfolio managers and analysts directly related to their ability to add value to our participants. Our people's total compensation is less … driven by salary and benefits and more based on specific performance. The other part of the equation: the amount of dollars we pay them for adding value is determined by the market. When the market went up in the late 1990s, we paid our people more for the delivery of value added. As the market for talent went down in 2002, 2003, we paid less. The deal we have with our people is we pay for value added and we pay the market rate.

A There are a number of reasons. … For our analysts in technology and biotech and health care, the action in the industry is out on the West Coast. We had people traveling there frequently. San Francisco is not a bad place to set up shop … there is a deep labor pool. Also, it is not anywhere near New York. After 9/11, the fact that we had 100% of our investment people between Grand Central Station and the UN was considered to be imprudent. … Charlotte has a deeper fixed-income population than equities. So we now have investment professionals in three different sites. I would say business continuity was behind the timing of the moves.

A Let me say something that is not my quote: Hedge funds are not a different asset class; hedge funds are an incentive structure. The primary thing that distinguishes a hedge fund is the incentive structure, which tends to be a flat fee, usually 1% or 2%, plus 20% of the profits. Now the fact that people get paid directly for adding value — whether the 20% of profits is the right number — is the right idea. That part of the hedge fund incentive structure is a customer-friendly notion. I like that about hedge funds. TIAA-CREF to the extent that it does anything that resembles a hedge fund will not resemble that tremendous spiraling of fees to the participants. We are consistently looking at it like we are looking at corporate governance and portable alpha. I like the fact you are able to produce streams of uncorrelated alpha with hedge funds. Hedge funds are very fashionable. We are trying to separate the fashion from the substance. But they aren't quite the right structure for our participants. We keep thinking about it. … They are a combination of things that are productive toward building more efficient portfolios and things that are counter to people's financial interests. We are constantly look at that equation to see if we can get rid of that part counter to their financial interest.