Donald C. Kendig, the retirement administrator at the $6.6 billion Fresno County (Calif.) Employees' Retirement Association, is most concerned about consumer and federal government spending and debt hitting a tipping point “that we cannot recover from” and a hard landing that the Federal Reserve likely “won’t be able to offset.”
Kendig is also worried about “significant environmental collapses that are closer than they seem affecting food and other resources,” as well as artificial intelligence, “where it is easier to do more harm than good if we are not careful.”
"Our asset allocation is set up to mitigate interest rate and inflation risks; however, no matter how an asset allocation is set up, a hard landing or a debt collapse would hurt us and everyone else,” Kendig said.
A CPA by training, Kendig has served as the retirement administrator of FCERA for the past decade, after working just under two years in the same role at Ventura County (Calif.) Employees' Retirement Association (VCERA). Prior to that, he served as a trustee for Santa Barbara County (Calif.) Employees’ Retirement System for nine years. VCERA now has $8 billion in assets, while SBCERA has about $4.2 billion.
“I learned the fundamentals for public pension plan administration and investment theories and practices while I was a trustee,” he said. “Public pension organizations generally have wonderful training programs.” Santa Barbara’s retirement administrator, Oscar Peters, was also a “very good mentor,” Kendig noted.
Staff a key to success
In his prior posts, Kendig realized that staffing is key to the success of pension funds — but having a lot of employees is not necessarily a good thing.
“Too few staff and we all suffer,” he said. “Too many staff and we waste valuable pension assets and I endeavor to keep us right-sized.”
As retirement administrator, Kendig serves effectively as the chief investment officer — and he noted that the three pension funds he has worked at did not have a CIO during his tenures (although VCERA added one after he departed and SBCERS added one by a different title).
“I am very accustomed to having to perform both roles (retirement administrator and CIO),” he noted. “(Pension) plans have been very consultant-dependent, starting a few decades ago. They (consultants) report to the board on a monthly or quarterly basis, but they do not perform the CIO function, unless you pay them a lot of money for an OCIO relationship.”
Now FCERA has an investment officer, Conor Hinds (hired in December), as well as an investment analyst, Jason Chin (hired in August) — and along with Kendig, they make up the entire investment staff.
“Conor is now at the forefront and will be my main staff member to develop an investment strategic plan, for the board’s review and approval, which will outline how we see our newly formed investment unit evolving to provide more investment oversight and underwriting for the board,” Kendig explained.
“Conor is working on a due diligence plan now for the monitoring of all our investment managers and partners. Conor and Jason are (also) meeting with our liquid managers quarterly and our private GPs at least annually. Jason is doing the legwork for Conor, and Conor and Jason are doing the legwork for me. I get the pleasure of focusing on the big picture. While Conor is charged with the drafting of many of the plans, I get to translate the board’s policy direction and guide his efforts.”
In April, FCERA hired NEPC as its non-discretionary general consultant, replacing Verus, and the pension fund will be starting an asset-liability study on Aug. 7, Kendig noted.
“What I have told managers is that it is the riskiest time for them because even if they are performing well, they can be asset-allocated away or reduced due to no fault of their own,” he said. “It can also work the other way with larger allocations, but when there is an increase, usually another manager is added for a net reduction to the existing manager.”
Asset allocation shifts
As of March 31, FCERA’s largest allocations were to domestic equity 28.1% (29% target), global fixed income 20.5% (22%), international equity 19.9% (21%), private equity 8.5% (8%), real estate 7.9% (8%), infrastructure 5% (4%) and private credit 7.1% (8%).
“Private equity is overallocated because we are not getting the return of capital that was forecasted by our discretionary consultant, Hamilton Lane,” Kendig said. “Market forces are outside of everyone’s control, but now that distribution trends might lag for more than a year, we will likely see reductions in future allocations for a short period of time as a new equilibrium is established.”
The infrastructure overallocation is intentional, he noted. “Our single infrastructure manager, IFM Investors, offers a flat fee based on commitment levels, which is tiered, but not blended,” Kendig said. “We overcommitted to reach the next tier and reduce our overall fee as a percentage of assets. We intend to grow out of the overallocation and possibly add satellites to the core at some point down the road.”
Kendig said the pension fund is currently underallocated to private credit “due to delays in establishing future funding tranches and we have rectified this with forward-looking commitment periods and amounts that should get us to target in the next year, if not two.”
Real estate would be overallocated due to our “core real estate assets not being as liquid as we thought,” however, “the closed end vehicles have been winding down and offsetting.”
The lesson here, Kendig observed, is “even if an open-ended fund promises quarterly liquidity, it usually isn’t there when you need it.”
He added that, “even though we are overallocated by about $30 million in our core real estate potion of the allocation, I have let NEPC know that I want to keep allocating and obtaining vintage year diversity. The composition of the real estate allocation should balance out within the next 12 to 24 months as the redemption request is honored and new closed-end allocations are made.”
