Q: How do engagement efforts and proxy voting fit in?
A: We think that it's hand-in-glove. You can't do one without the other. As a large institutional investor, we have a fair amount of voting power. It means we get a chance to speak to management. We get a chance to learn how they think about their process, their procedures, their outcomes, and have good inquiry and feedback loops. We do vote our own securities, but actually engaging with management is something that we intend to increase.
Q: Is there a way to quantify that?
To be fair, we want to do it in a structured way. If you go after everything, you accomplish very little. To date, we've targeted methane flaring reduction as a key issue because we think that's a meaningful driver to change.
We started this journey by taking one of our seasoned investment professionals and saying, would you please focus on proxy voting? And now would you please think about climate? Part of this plan was also to make sure that we resource Nathan Blumenshine. We promoted Nate (to vice president, director of stewardship). We created a division around him. We hired two additional professionals. Now he leading his own stewardship team. He reports into me. That's not meant to micromanage him, it's meant to say, we think this is important and we want to make sure we've got what you need.
Q: Let's flip to private markets, which are currently about 25% of the portfolio, and private credit, in particular, is about 9%. What role are you looking for private markets to play in the portfolio?
A: I've inherited a really seasoned, successful private markets program, with a lot of gratitude and respect to my two predecessors: Mansco Perry and Howard Bicker.
We’re looking at this as a different source of alpha for the portfolio. We’re looking to balance — just broad strokes when we think about asset allocation — public equities, fixed income and our private markets. We know that when we invest in private markets, obviously we're accepting illiquidity. So liquidity, we value greatly in a public pension plan. We have a covenant to meet benefit payments. Given how highly we value liquidity, we know that we need to have an allocation that’s accretive to the overall portfolio over long periods of time. When you look over that three, five, 10, 20 (years), since inception, this portfolio has added meaningfully on an absolute basis and relative to public markets.
We know that every single year that's not going to be the case. But if you're a long-term investor, you have to look at private markets through that lens. It's not a quarter by quarter, it's not a year-by-year investment.
Q: We have written quite a bit about investors' enthusiasm for private credit. Some now are talking about bubbles. Do you subscribe to that?
A: I think there can be a bubble in any particular asset class, any time. And yes, there have been remarkable inflows in this environment, and it's worth taking note. Having said that, we are still open for the right manager with the right strategy to invest in private credit, again in our private markets portfolio. First, the real question is that balance. Can we get that same exposure in a liquid public markets manager? The key inquiry for us is how are we balancing liquid vs. illiquid and where can we catch the premium. We have not mandated that we're going to do X percent direct lending or X percent in private credit. We're taking that decision on a manager-by-manager basis, our level of conviction in that manager — do we have a long-running relationship and do we think in this moment in time, that strategy makes sense.
Q: There’s the issue of AI, and how that’s fueling a surge in the need for power and data centers, which people say is an attractive asset class.
A: That need is going to continue and I think that feeds right back into that energy transition story. There's going to be a need for more power. OK, what happens next? The data centers go into production, they need dedicated power or they've got to tap into the existing grid. There aren't natural technology and connection points today that can handle it. It calls for a lot of investment, and we think that's a space where these funds focused on it are well-positioned. So there's a giant energy transition story going on there for the grid and power.
Q: Are there other areas that you're thinking about?
A: When we're thinking about asset allocation in the portfolio, what we're working through right now is we're at this interesting inflection point, a transition really in Fed policy, monetary policy. It's presenting a transition point for how we think about fixed income. We've been able to take advantage for the last two years, really, of letting cash work hard. We have been purposeful about having a higher allocation to cash, a lower allocation to duration, and that has served us well.
But we are fast approaching a point where having a 4% to 5% allocation to cash is not going to be our best and highest use of capital.
Private markets, I'd come back to private equity a little bit if I could. I think the last two years have been challenging because exits have been dramatically down. We are starting to see distributions increase. Hard to say yet whether that's a durable trend, but it is the first time we've seen it in probably two years.
Q: Are there any global developments you’re watching — or in the U.S.?
A: A couple of things, and they're almost more macro than anything else. I don't think we can ignore the broad macro theme of how inflation is really living at the consumer level because that consumer does drive so much of how the U.S. economy operates. We have a thesis, that like many others, that the economy is on pretty solid footing in large part because we haven't had industrial policy like this in the United States in a very long time.
You have this industrial renaissance; you have hope that you have a vibrant middle class coming back into play. I think that bodes really well. We're not going to bring everything back into the United States in terms of manufacturing, but when you hollow out the middle class and all the manufacturing leaves the country, that's not a great setup for long-term stability. I think that's a theme that we want to watch very closely because if that theme starts to fray, that's a negative indicator for the economy at large. So far, that theme is intact.
Then it's really just thinking about the deficit and are we going to take some action writ large. Right now, we have a tremendous debt burden. That's not sustainable. It hasn't impacted the markets yet, but at some point, we're going to have to make hard choices and address that overarching policy.
Q: What were your first-year goals when you came in?
A: First and foremost was to make sure that we had a common understanding about the mission. Next was to make sure that I had spent time myself with the senior team making sure that there's a great deal of comfort on the current portfolio. One, to the extent I hadn't worked with a manager before, making sure I got in front of them for an in-person meeting. Identifying were there any big picture projects we needed to undertake right away. And then making sure that we had structurally the organization that we needed to have. We tackled those pretty quickly.
I am a strong believer in that each of us comes here as a leader, whoever's sitting in this seat, that's sort of job No. 1, but that cascades down the organization and it has to.
The first thing was to make sure that we had an executive leadership team, not just one person in the seat. We took three exceptionally talented individuals who are already performing at a very high level and we gave them jobs and titles that fit both their skills, their accomplishments and what we hope to achieve. They’re the internal investment committee now. So they're engaged in every material decision that we make, both on the portfolio and from a management perspective: Andy Christensen, deputy executive director; Erol Sonderegger, deputy chief investment officer; and Andrew Krech, managing director of private markets and active equities.
Step two, then we took all the leaders of the dominant groups and formed a senior leadership team.
We now have co-heads of private markets. They're exceptional. Jonathan Stacy and Cassie Boll have been tasked with building out a team and we can talk about a couple of the initiatives they're working on. They are building out a co-investment program and broadening our pipeline to increase our depth in the middle-market segment. We're in that segment now, but we think broadening that makes a lot of sense.
Q: And they're in the process of building that out in co-investments?
They're in early innings. They've done some internal promotions and they brought on two analysts recently. We're on the verge of probably one more senior hire in that space. So their efforts right now are making sure that every quarter we're bringing in managers, presenting managers for investment, building out that team and energy transition. So as a part of the energy transition, they're tasked with identifying that pipeline of who fits in that space
Q: Had you done co-investments before?
A: We've done co-investments for quite a while through trusted partners, not directly. So this will be the first time, and I think this is going to be a multiyear process. This will be the first time that we tackle taking that on as a direct investment opportunity with our managers.
Q: Sounds like you've been doing a lot of hiring. How big was the staff when you came on and what is it now?
A: When I came on, we were talking between 30 to 34 staff members. As a part of that process we talked about earlier, of thinking about looking broadly across the organization, one of the things we tried to identify was where do we have places we need to add resources. So for example, that stewardship component, where do we need to make sure that we have appropriate redundancies because it's such an important function.
We did a pretty fulsome analysis and we decided it would be beneficial to have a robust analyst class so that we were training people in-house to rise up in the ranks or frankly go out into the world of investments and be fully trained. At the end of the day, we're at 46 people. A large portion of that has been in the analyst community and adding a couple of senior folks where we thought groups needed to be augmented.
Q: How’d you get the legislature to go along with that? I've heard it's super hard to add staff.
A: I think that's right. So 100% debt of gratitude to Mansco Perry. He spent a number of years really talking about what's our mission, how do we do it? The assets we're responsible for. How that's grown over time, but staffing hasn't, and not just the assets but the mandates that we have responsibility for. It took a number of years. Through those conversations, he actually got approval to add staff. It's a heavy lift to go from approval then to undertaking the process. So I don't think I could have asked for a more generous setup.
