Illinois Municipal CIO Angela Miller-May on reallocating portfolios amid a volatile market

Angela Miller-May, chief investment officer of the Illinois Municipal Retirement Fund, Oak Brook, stepped into the role in August 2021. The stock market was on fire, Russia would soon invade Ukraine and the Federal Reserve was set to launch an unprecedented series of interest rate hikes to combat inflation.

She sat down for an interview to discuss her investment reallocations since joining the $49 billion pension fund; why fixed income presents opportunities; the geopolitical risks and outlook for a recession in the U.S.; whether the Federal Reserve is done raising rates; and her personal journey to the CIO job.

A: In August 2021, I was sitting at home in my office that I share with my husband. I was CIO of the Chicago Teachers' Pension Fund, and I felt a little disconnected with the team and the opportunity presented itself. I pursued it and ended up here. IMRF is the gold standard of public pension plans.

Then the world just quickly changed. From then until today, the volatility has been crazy. When I walked into IMRF, I had a board meeting two weeks after and had to rebalance the portfolio. They were 5% over target in domestic equities, and it was all growth. That led me to rebalance and lean into fixed income. We needed to get to target. It was the best time to rebalance.

Growth was coming down; value and growth sectors were shifting. We needed more diversification in the portfolio; we were biased toward small cap and growth and we needed to optimize the portfolio.

As we entered 2022, Russia invaded Ukraine. We completed another rebalance just before that. I wanted to implement more defense in the portfolio and not be so exposed to equities. Not that I'm psychic, (but) it was good timing. I always look back to that rebalance and think it should be more. But it's hard to move a portfolio of this size, at that time $53 billion.

Chicago Teachers was $13 billion. It was new to me to make those shifts as quickly, but we did.This next 10 years of my career – I had 11 years in low-interest-rate period after 2008 (while managing Chicago Teachers) — is the complete opposite. Some of my concerns are the divisiveness in our government right now and geopolitical risks we're facing.

A: Right now I feel the Fed is done for this year with rate hikes. They're content to wait and see as long as data around inflation, jobs and consumer spending is supporting the Fed's objective. I think the Fed will pause and not raise this year. Interest rates will stay high for a good amount of time. I don't see the Fed cutting rates, not even thinking about it for the next three quarters into 2024. There's no incentive for them to do anything.

A: When we rebalanced, we leaned a little more into bank loans and fixed income initially. That was short term. In the long term, as rates have increased, we see opportunities in private credit.

This last asset allocation and liability study we took in December 2022, we shifted more out of domestic equities and a little out of bank loans, which we used as a proxy for private credit. We increased that allocation to 4% and we also implemented a three-year plan to get there.

The first year, this year, we decreased equities and bank loans by 1% and increased private credit by 1%. Over three years we'll see if the plan is working, and the opportunities are still there. We knew it was a good time to get into private credit; we'll pause, do the searches, it takes time to allocate that type of money.We conducted a huge private credit search over summer, and we hired eight managers in August. We'll do phase two in December. Every year we'll pause to see if we proceed and increase our benchmarks every year … We did allocate more than $1 billion to fixed income. We've seen an increase of almost 3% in returns in the fixed-income asset class according to our most recent capital market assumptions. With private credit we get double-digit returns and have less risk getting there.

A: We normally only fund our cash accounts to pay benefits at month end. Now we're thinking we can hold 1% in cash and let it gain some income. We've moved that buffer up. It was a just-in-time funding to pay benefits, but now we're shifting toward allocating the 1% as part of our asset allocation. We expect certain returns from that asset allocation; we're earning income off the cash.

A: No, I don't think the Fed has historically increased rates that fast. Inflation, I've had it personally in my lifetime. Now managing a $50 billion plan, it's a concern. Inflation is coming down, but I think the individual who's out there, their purchasing power is limited. They're still seeing high prices in certain areas.

A: When I think about my commitment to minority-, women-owned, disability and veteran managers, it's where my purpose and passion meet. My purpose is to have the best-performing portfolio. The passion is having an industry that's diverse, where a person like myself can start at an entry level job, and rise to a CIO spot.

I'm a capitalist as well. So it's about performance, return, risk and when you think about those things, think about diverse managers. They serve a purpose in the portfolio. They're complementary to larger managers, they're small and operate in the middle market where we see opportunities. They find various paths to exit, so more distributions for us. It's a less competitive space. By leaning in on diverse managers, it's minimizing risk and creating value. It helps us to have less variations in our portfolio.

We're a long-term investor. If I could have steady, efficient returns that are above actuarial rate of return, it's boring, but we're securing the pension fund. Diverse managers can perform as well as majority-owned managers. It's part of our fiduciary responsibility to invest in the best managers, the managers who can contribute to our portfolio being successful. I'm looking for any strategy I can find. Diversity is a strategy and we should treat it that way.

When I came (our allocation) was 21%, and we were right at $11 billion of the total. As of September, it's at 26% and some of the rebalances and hirings of managers contributed. So it's about $13 billion.