Wurts & Associates Inc. hopes to jump-start its investment outsourcing business by hiring two top executives from the $40.3 billion Alaska Permanent Fund Corp.
Jeffrey Scott, the fund's chief investment officer, will serve as Wurts' first CIO. Max Giolitti, Alaska Permanent's director of asset allocation, will be director of risk allocation.
The duo, who managed money and risk together for more than a dozen years at Microsoft Corp. and their own hedge fund before joining the sovereign wealth fund in 2008, will leave Alaska in early August. They will join Wurts in the firm's Seattle headquarters later that month.
Mr. Scott is the architect of the innovative, risk factor-based approach to asset allocation that was adopted by the Juneau-based fund in 2009 (Pensions & Investments, June 1, 2009). Mr. Giolitti built the data collection and risk management systems that permitted Mr. Scott to recategorize fund investments by risk, rather than stringent asset class buckets.
It's an approach that Jeffrey MacLean, Wurts & Associates' president and CEO, is certain will resonate strongly with other institutional investors disappointed by the lack of diversification and poor returns of their portfolios — constructed using mean-variance optimization techniques — during and after the financial crisis of 2008.
“Mean-variance optimization hasn't worked,” Mr. Scott said in an interview. “Among the main risk factors in portfolios — equity, interest rate, credit, inflation and currency — No. 1 is equity risk. Of the many different ways to look at diversification, the only way to do this effectively is to break it down to risk factors and analyze from there.”
Mr. Scott said Alaska fund executives made “100% progress” in developing the necessary framework, including a new governance structure; a comprehensive risk-based investment policy; a new asset allocation based on economic conditions; and an automated comprehensive risk dashboard to run the system.
Industry sources speak highly of Mr. Scott's work at the Alaska fund.
“I'm a big fan,” said Clifford S. Asness, managing and founding principal, AQR Capital Management LLC, Greenwich, Conn. “Jeff joined an organization where investment management processes were not very modern and he's put Alaska on track to build a better portfolio and to better manage risk. He's not too radical, but he's not toeing the traditional line. He's unique that way.
“All my reasons for sucking up to Jeff are gone now, but I still think the world of him,” Mr. Asness quipped.
AQR runs about $650 million for the Alaska fund as one of five “external CIOs” Mr. Scott hired in 2010 to manage real return portfolios with a benchmark of 5% per year after inflation.
The Alaska Permanent Fund's performance as of March 31 was 3.51% for three months; 18.78% for the fiscal year to date (nine months); 12.86% for one year; 2.55% for three years; and 4.01% for five years. Multiple-year returns are annualized.
The long-term return objective is an average of 5% per year over the long-term, which Mr. Scott said is a typical business cycle of between five and 10 years. The fund's short-term return objectives for periods ended March 31 were 3.21% for three months; 6.27% for the fiscal year to date; 7.68% for one year; 6.53% for three years; and 7.26% for five years.
Neither Michael J. Burns, president and CEO, nor Laura Achee, director of communications for the Alaska Permanent Fund, returned calls by press time seeking comment about the departures of Messrs. Scott and Giolitti.
As to whether he and Mr. Giolitti are essential to the continued success of the Alaska fund's investment program, Mr. Scott said, “Under Mike Burns, the trains will keep running. My successor will be able to pick it up and make it run.”
As CIO, Mr. Scott will oversee all investment operations and run Wurts' discretionary money management business. He will use the global factor-based investment modeling technique he developed to manage a $56 billion global, absolute-return corporate portfolio as assistant treasurer at Microsoft Corp. and replicated at the Alaska fund.
Mr. Giolitti will replicate the risk management system and data collection system needed to support the whole consulting team and outsourced risk management solutions business.
In the two years since its launch, Wurts' outsourced investment management program has attracted $1.25 billion from two U.S. clients with portfolios of $500 million and $750 million. Mr. MacLean, Wurts' CEO, declined to identify the clients.
Portfolio sizes will be one of the biggest changes for Messrs. Scott and Giolitti. Wurts' target clients for customized, total portfolio outsourcing are public and corporate defined benefit and defined contribution plans, endowments, foundations and health-care funds with $2 billion or less in assets, Mr. MacLean said in an interview from the firm's El Segundo, Calif., office.
But Mr. Scott is unfazed. “Building solutions is my background and what I really like to do. I was a salesman at Nordstrom years ago and I realized back then that you can't sell everyone green shoes. Rather than try to sell everyone green shoes, you need to offer a customized approach to every client.”