Before joining Chicago-based Boeing Co. as chief investment officer in 2003, Mark A. Schmid worked for DaimlerChrysler Corp. for 17 years in 11 different positions, including CIO in his last six years with the corporation, overseeing its $30 billion in pension assets. By the time an executive search firm recruited him to join Boeing, Mr. Schmid said, “I had more or less answered that question: What do you want to be when you grow up?” Joining Boeing “was an outstanding opportunity to lead a bigger pension fund and to build a team.”
You have built a team of 20 at Boeing. We started with eight (including himself), and then we increased it to 14 and more recently to 20. We are at the final stages of filling the whole team. I have an accepted offer (for director of hedge funds), and there is one other position, senior manager of public market equities, that is open.
Is the growth in staff because of the growth of alternatives? I would say the growth of alternatives is probably the first item, and then the other one is the growth in assets. We have probably over $80 billion. When I started, it was in the mid-50s. Then the other reason is our focus on risk management. We have six people in alternatives and five people in risk management. ... When I started, there were two (in risk management).
What is Boeing's current pension model? Our current pension model is obviously a long-term focused model. It's a liability-driven investment philosophy, coupled with a very diversified alternatives strategy. ... We've moved 45% of the pension fund into long-duration bonds to match the pension liabilities more closely. With the remainder of the assets, the other 55% is split pretty evenly between alternative strategies and public equity strategies.
What are the key issues affecting your pension fund now, your pension fund investment strategy? We've spent a lot of time on strategy. We've actually done three asset liability/allocation studies in five years. The first one was in '02, the second one was in '04, then ... in '06. It's this sort of changing landscape in managing pensions. It's accounting rules, with new legislation out of Washington, the complexity of managing a diversified pension fund that includes all these strategies. So it's a balanced or hybrid strategy where we are trying to manage the assets in accordance with the benefit payments. So that we match those as closely as we can, but at the same time get a return that's commensurate with an 8.25% return assumption over the long term. It's sort of a balanced strategy of the fixed-income side being able to satisfy those liabilities and, at the same time, trying to get the necessary return through the alternative strategies and the public market strategies.
How has that overall strategy worked out? We are currently at 16% in alternatives. Our long-term plan is ... to grow that to 27%. ... Actually, those strategies are doing quite well in the turbulent, volatile environment we are currently in. ... (The alternative implementation is expected to be completed) in about 2011. So we are being very thoughtful, very prudent on the alternative side. On the public side, we actually made that move during the last year, dollar cost averaging, in moving out of equities and into fixed income. The rationale for that is we had done very well the prior four years in our portfolio and we knew our funded status was very good. So we wanted to get that in place in one year. ... It turned out to be, knock on wood, a pretty good call.
It sounds like it's time for you to do another asset-liability study. Is your strategy set now in terms of your target allocation? I would say in this environment more focused on active management (and) more dynamic markets, my personal belief is asset-liability studies are not just once every five years. I think you truly do need to take a look at that more frequently, probably two or three years is probably the right frequency now. ... We could be back out looking at it again sooner rather than later.
What role do consulting firms play? We have a retainer consultant; we have a very long-term relationship with Russell. It goes back to Seattle days. I believe it's in excess of 35 years now. And we also have a relationship with Cambridge Associates. We wanted to get the power and their knowledge of alternative strategies. ... It's a little bit of a hybrid strategy, meshing a pension strategy, and we accomplish that by engaging Cambridge along with Russell.
The days of the 1980s and 1990s seemed like one continuous bull market. I think the return environment is going to be more challenging. ... I think they are going to be lower than the last 20 years. The return assumption was I believe about 9.25% five years ago and we're down to 8.25% just like many of the other large pension funds.
Does your pension department have any regular connection with any universities or academics? Yeah, I would say a very strong tie in with Northwestern University. ... We decided to add two outside CIOs to our investment committee. We added Will McLean from Northwestern University, who is the current sitting CIO. ... We get the knowledge and experience of the endowment world with Will. We also added Myra Drucker, who used to work at General Motors Asset Management and Xerox. In terms of the governance structure, we not only ramped up our team with investment experience, but we also ramped up the investment experience of the investment committee.
The two outside advisers, you originated that? That's brand new this year. ... That's (having the outside advisers on the investment committee) fairly innovative on the pension side. We wanted to make it a more robust investment discussion.
Can a pension fund do what Yale University does, moving so much into alternatives? I think it's a size issue. For example, our pension fund is $50 billion. Will McLean's Northwestern portfolio is in the single digits. ... It's much easier for him to invest in hedge funds, which tend to be firms that manage much smaller pools of amounts. So we're constrained by the size of our pension fund. So we could never get to 50% in my opinion.
So it would be harder to raise that alternatives allocation? You could tweak it a little, but not much more in my opinion. The other factor for an endowment: They don't have surplus accounting reporting requirements like we have. They don't have benefits stream they have to match to. ... So an endowment might have 10% in bonds and they have 90% to work with to go into alternative strategies. We don't have that ability.
What are you keen on doing in your personal time? I do like to golf and enjoy reading investment books. That's probably it. I'm not that complex of a guy.
Of the investment books, what are you reading? (Mohamed A.) El-Erian's book “When Markets Collide,” Peter Bernstein's “Capital Ideas,” and the latest one I got is “Nudge” (by Richard H. Thaler and Cass R. Sunstein). Those are the big three I'm reading now.
Contact Barry B. Burr at [email protected]
