It's challenging enough for any public pension fund CIO to find alternative investments at the best price from the best manager at the best time. However, the $145 billion New York City Retirement Systems presents multiple extra hurdles, ranging from the system's complex structure to regulatory restrictions to insufficient money to hire enough professional staff members.
“The complexity of the governance system does not help your asset allocation up front,” said Lawrence Schloss, who just completed a 45-month tour as chief investment officer of the system of five separate pension funds. “It's the way it had been conducted before I had arrived. It has a lot of different nuances to it.”
Mr. Schloss navigated the nuances. He made the pension funds' first hedge fund investments, restructured the private equity portfolio and increased commitments to these investment categories as well as to real estate and opportunistic fixed income. He presided over an increase in the investment staff, and he helped change the pension system's procurement practices to significantly cut the time for hiring investment managers and consultants.
Mr. Schloss recently spoke to Pensions & Investments about efforts to diversify the systems' portfolios, improve returns and lower their volatility through alternative investments, as well as to reflect on his role as CIO.
He said his greatest accomplishments were improving the process of manager selection and management of his department, increasing the size of the professional staff, and building a better relationship between the comptroller's office and the pension funds' trustees.
Mr. Schloss resigned in mid-October. He is now president of Angelo, Gordon & Co., New York, a manager specializing in private equity, real estate and credit. Seema Hingorani, director of public equities and hedge funds, is interim CIO.
Mr. Schloss said it took about 18 months to increase the alternatives allocation. “The implementation is ... very dependent on what's available at the time, your staff constraints and the markets in general.”
The goal is to raise the aggregate alternatives allocation to 20.5% among the five pension funds; it was about 13.2% as of June 30, and 9% just before he was appointed CIO.
As of June 30, the system had 6.3% in private equity, 3.3% in private real estate, 2% in hedge funds and 1.6% in opportunistic fixed income.
Mr. Schloss had to deal with five separate city pension funds with a total of 58 trustees, and each has a different investment philosophy and different appetite for alternatives. For example, although the pension system made its first investments in hedge funds in 2011, two of the five funds still don't invest in them.
Because hedge funds and other alternative investments invariably require higher fees than traditional stock and bond investments, Mr. Schloss said trustees are sensitive to expenses for new investments. “The simplest part of that conversation is that the only thing that matters is net return — period,” he said. “If my expected net return (for one investment) is higher than someone else who charges us less, we should pay more to get a higher rate of return.”