When Robert T. Theller took over as the retirement administrator of the City of Fresno (Calif.) Retirement Systems in January 2016, he found a pension fund that had been very conservatively managed and with investment committee members who were cautious about delving into alternative asset classes.
Since that time Theller, whose job title encompasses the responsibilities of both a chief executive officer and a chief investment officer, has gradually increased the portfolios' exposures beyond just traditional stocks and bonds.
The now $4 billion pension system is somewhat unusual in that it comprises an Employees Retirement System and a Fire & Police Retirement System. Theller explained that these are separate legal entities and have separate boards.
“They were organized at different times with different employee groups in mind by the city,” he said. However, as it is more cost-effective, the two boards operate as a joint board for the purposes of approving investments and general system infrastructure, he noted.
As of July 31, ERS comprised about $1.8 billion in assets, while F&P accounted for $2.2 billion.
Upon arriving at Fresno, Theller did not initially make many significant changes.
“Both pension systems were overfunded when I arrived due to both (having) a very conservative management style, and (with) the sponsor issuing a pension obligation bond in the mid-1990s (ahead) of the tech bubble,” he explained. “What I have worked on since is helping the boards to further diversify while keeping the risk and volatility lower or level with where we were.”
The City of Fresno Retirement Systems, or CFRS, had a small allocation to private credit prior to Theller’s arrival, he noted, and the boards’ highly conservative approach prevented them from investing in other private market allocations and opportunities.
“Chad Jacobs, the investment officer, and I — along with our consultant NEPC — have worked with both boards to increase their understanding of and tolerance of private market opportunities to take advantage of our lack of liquidity problems and move to more of a long-term focus,” Theller said.
Asset allocation changes
Early in his tenure Theller recommending switching the U.S. domestic equity portfolio from active managers to passive, by demonstrating to the boards that the “information premiums” provided by active managers in the past no longer offered much chance of consistent outperformance. (The domestic equity allocation is still entirely passive, he noted.)
Since that time, Theller has recommended moves into various other asset classes, including real estate (core, core-plus, and European), as well as private debt, direct lending, master limited partnerships, private equity, infrastructure and venture capital.
As of June 30, the pension funds' actual asset allocations comprised 24.6% domestic equity; 20% international equity; 13.1% private credit; 11.6% core fixed income; 9.7% core real estate; 7.2% private equity; 6% infrastructure; 5.2% private real estate; 1.6% multi-asset alternative credit; and 1% cash.
As of Nov. 30, 2015 (a few months prior to Theller’s arrival), CFRS had 32.5% of assets allocated to domestic equity, 28.9% to international equity, 25.1% to fixed income, 13.4% to real estate, and the remainder in cash, according to the agenda of the Dec. 22, 2015 board meeting.
However, Theller noted that even with all this diversification, the pension funds' boards are still somewhat cautious about some alternative investments, like real assets and private equity.
“The slow build-up (of alternative asset classes in the portfolio) is more evidence of recent and increasing board-level understanding and comfort with the very different risks involved with something other than a 60/40 portfolio,” he said. “We could be viewed as being ‘behind the curve,’ but I choose to see it as it really is — a very careful conservative set of boards taking on risk in a measured and predictable fashion.”
The risk tolerance the boards have adopted, he added, is “appropriate” for the pension fund and “more importantly, for our members and retirees.” CFRS has about 7,600 members and retirees.
“We’re currently in the middle stages of implementing a pan-Asian allocation that has been percolating for five-plus years,” Theller added. “We (also) have four potential allocation and theme changes we’re working on currently.”
The CFRS investment staff comprises Theller and Jacobs.
“The two of us collaborate on the big picture, long-term focus and new ideas,” he said. “We work together with NEPC on bringing recommendations for adjustments to the asset allocation, and macro-overviews for the two boards of trustees to consider and hopefully adopt.”
Once adopted by the boards, Theller and Jacobs “work together to identify and perform potential manager due diligence before suggesting them to the boards.”
Typically, adopting a new allocation or hiring new managers may take 18 months or so, he noted, “but we’re currently in the final implementation of one that has run more than five years from me broaching the idea to hiring managers.”
All external managers
Jacobs maintains the day-to-day contact with the pension funds' external managers for reporting and problem-solving purposes, he said.
The CFRS portfolios are currently 100% externally managed. “We are considering a recommendation to our boards to bring portions (of our assets) in-house,” Theller said.
Theller said while he has to answer to the two boards, the boards have “worked hard to develop and maintain a very collegial and collaborative relationship with me and my team.”
As fiduciaries, the board members make the final decisions on any allocations that the investment staff recommends. “The only exception is that the staff will decide and provide an update to the boards afterwards on any private co-investments,” he added.
Came from Ohio
Prior to joining CFRS, Theller spent a decade as the senior investment officer of public markets at Ohio Police and Fire Pension Fund, Columbus, which now has about $18.2 billion in assets.
“I spent 10 great years at OP&F with wonderful co-workers, as well learning (about) and expanding (the fund) into new asset classes,” he said. “My duties kept increasing and growing as they kept trusting me with more (responsibilities).”
But what Theller didn’t have there was CEO-type experience. So, looking to advance his career, he packed his bags for the West Coast.
“I felt I had more to offer and when the CFRS boards and their recruiter at Alliance Resource (Consulting) offered (the position), it looked like a good fit for what I wanted to do,” he noted. “It also helped that my wife and I wanted to move someplace warmer from our Ohio winters.”
But moving more than 2,000 miles to California did not pose much of a “culture shock” for Theller. In his younger years he had been stationed at Fort Ord, the former U.S. Army post near Monterey, Calif., and had visited the Golden State often for vacations and investment meetings.
“Fresno, however, was a pleasant surprise,” he admitted. “The southeastern part of Ohio (where) I’m from is agriculture-based and part of Appalachia. The people there are very down-to-earth and straightforward. The best part of Fresno is the people, who are mostly of the same mindset and also from an agricultural background. (But) it’s still a bit of a shock seeing orange trees instead of corn and soybeans. And the first time (the temperature) hit 115 degrees here was also a shock.”
Theller is also an attorney, having passed the bar in Ohio in 1998 and bar for the U.S. Southern District of Ohio in 2000, while he was still working as an active portfolio manager at the State of Ohio Treasurer’s office. “Since the Treasury had oversight of the five state pension systems, I worked on pension compliance issues as well,” he said.
That unusual combination also led Theller into teaching financial institutions management at The Ohio State University’s Fisher College of Business in the early 2000s.
However, as he now gets to run the CFRS full time, Theller said his law license is “on hold” with the Ohio Supreme Court, and he currently does not practice law.
Macro climate
Looking at the current macroeconomic climate, Theller said he is most concerned about the upcoming U.S. presidential election as the “uncertainty and potential impact to the markets and economy won’t settle till November or December.”
Currently, the U.S. election seems to be weighing on the investment markets rather than providing any benefits in the near term. “Both (political) sides seem to be targeting the Federal Reserve and are turning any (interest) rate cuts into a political — instead of an economic — issue,” he said.
As such, he is concerned about how the U.S. election may impact his fund’s investments and even pension regulations.
“The short-term volatility impacts to liquidity could be problematic,” he said. “This cycle seems especially volatile, and we are trying to keep in front of our liquidity needs as well as maintaining a larger reserve than normal.”
Over the longer term, Theller is concerned about possible regulatory and legislative shifts impacting pension funds.
“We’re a pair of smaller pensions and unfortunately don’t have much political influence to drive change," he explained. “What we do gain from being smaller pensions is the ability to find smaller bites in profitable allocations that are too small for the bigger players but will definitely move the needles for us. The staff and NEPC will keep continuing to recommend a diversified portfolio to minimize risks and grow long term.”
Theller is also concerned about inflation as increased costs negatively impact Fresno’s retirees as well as CFRS’ investments. Conceding that inflation has been slowly declining, Theller still cautioned that the “bite” inflation has already taken has significantly impacted CFRS and its retirees.
“I was in high school in the 1970s and after living through it and seeing how hard it was on my parents, I’m very concerned over the long-term possibilities of deflation or stagflation,” he stated.
“We have trade wars developing and bad policy as evidenced by continually growing government debt. With trade imbalances and the offshoring of vital manufacturing, we have the potential impact of large or critical supply-side shocks. We (also) have some poor long-term economic policies as evidenced by current and historic government spending that's too high and interest rates that were artificially kept too low for too long. Poor monetary policies that are politically adjusted for the short-term ‘points’ lead to a poor long-term economy.”
