Exelon Corp., based in Chicago, is underway with a leadership transition as Northern Trust Asset Management veteran Jessica Hart takes over from longtime CIO Douglas Brown.
Brown, who is retiring July 1, has been the investment management head of the utility company’s defined benefit plan, 401(k) plan and — until recently — a nuclear decommissioning trust since the end of 2008. Before then, he was chief investment officer of Chrysler.
When Brown arrived, Exelon was a relatively new entity, formed in October 2000 by the merger of PECO Energy Co. and Unicom Corp., and was in the midst of the global financial crisis.
“What attracted me to Exelon, and what I think is one of my best accomplishments is it was pretty much a startup,” said Brown in an interview. “The company decided to start over with the investment activity with a whole new team, whole new governance structure and new investment strategy.”
In 2010, the company replaced its pension fund’s traditional, static asset allocation with a liability-driven approach split into a liability-driven investing portfolio and a growth-oriented portfolio, reflecting the trend at the time for corporate pension funds rocked by falling funding ratios following the global financial crisis. Also, the company created a new five-member investment committee that included two CIOs from other organizations and delegated most investment decisions to staff.
“It was a little challenging at first, but we sorted through all that, and I think we built a great team,” said Brown. “I’d say that was a significant undertaking that worked out pretty well.”
Change has been a constant during Brown’s tenure. In March 2012, Exelon purchased Constellation Energy; Brown and his staff were tasked with merging the company’s 401(k) plans, re-enrolling all the employees from the combined organization rather than simply mapping them over, and overhauling the investment options lineup. The 401(k) plan had $5.2 billion in assets as of Dec. 31, 2022.
Almost exactly a decade later, in February 2022, Exelon completed the separation of Constellation Energy.
Brown said the new Constellation isn’t entirely the same firm as the old Constellation, representing Exelon’s generation and competitive energy business.
That separation required splitting investment management functions, moving the nuclear decommissioning trust to the new Constellation Energy and splitting the investment staff into two entities, said Brown. That effort impacted Exelon’s succession planning, which was able to begin only after the completion of that project.
As of Dec. 31, Constellation Energy had $6.7 billion in pension plan assets, and as of Dec. 31, 2022, 401(k) plan assets totaled $4.6 billion, according to SEC filings.
Succession planning
“We did a very competitive national search to find our No. 2 position and ultimately, our successor,” said Brown. “That’s how we found Jessica, and I will tell you it was a very competitive process and we had some outstanding finalists, but we clearly made the right selection with Jessica because now the succession has come true, and she’s going to be the CIO, which is awesome.”
Hart joined Exelon in July 2022 as vice president, investment strategy, after more than 20 years at Northern Trust Asset Management in a variety of roles, most recently as senior vice president and OCIO retirement practice lead, multimanager solutions.
Hart said that Exelon, whose offices are a mere two blocks away from her old job at Northern Trust, provided her a unique opportunity to leverage her experiencing overseeing NTAM’s OCIO business focusing on retirement plans.
“Doug and I had never met, despite him being a Northern Trust client for (about) 20 years,” said Hart. “So we knew a lot of the same people, but we had never met. But I knew him by reputation.”
Hart said the biggest difference from Northern Trust is essentially moving from 45 different clients and sets of objectives and risk tolerances to, “I now effectively have one client.”
“It really allows you the opportunity in my line to go much deeper into how you’re thinking about investment strategy, our selecting fund managers, and then how we are meeting the corporate objectives at the same time,” said Hart. “In terms of where we are headed from here, I was not hired to rebuild anything or fix anything. We have a very well-articulated and robust investment strategy.”
Hart’s top priority over the next 12 months is change management.
“Really, it’s just continuing a lot of what Doug built around innovation,” said Hart. “Let’s look at all of our investment options that we created, with how we drive solutions. Let’s challenge each other, and at the same time, make sure we are keeping in mind excellence for our corporate risk tolerances and objectives.”
Hart said one of her key challenges beginning July 1 will be continuing to improve the funded status of Exelon’s corporate pension plans. As of Dec. 31, the DB plans had $9.402 billion in assets, compared with $10.988 billion in projected benefit obligations, for a funding ratio of 85.6%.
Hart pointed out that the investment staff has the additional responsibility of maintaining a closed plan that still has a healthy amount of benefit accruals.
“While you read a lot of articles about pension funds are better funded than they ever have, and we have absolutely made tremendous gains in funded status over the last several years, we still have room to go,” said Hart.
“We do still have very much a return-seeking orientation within the portfolio, within the construct of an LDI risk-managed portfolio, because the last thing we want to do is be at the mercy of the discount rate over time,” said Hart. “We think about that in terms of that challenge. A lot of what we’re focusing on is how do we make that pool of returns really work for us in the most risk-managed and efficient way possible?”
As of Dec. 31, the DB plan target allocation was 44% fixed income and 28% each alternatives and equities.
In the risk-seeking portfolio, which still makes up the majority of pension plan assets given the continuing benefit accruals, she said private credit plays a role in the portfolio, but she focuses primarily on opportunity cost.
“We have private credit, and every manager that knocks on our door is talking about some kind of private credit investment,” she said. The key she said is to understand that “asset class buckets exist for convenience, both for the asset owners and frankly, the managers, as a way for them to think about how they run their business, how they distribute, how they change, all those things.”
Private credit does have a role, said Hart. But she asks whether any given private credit investment can stand up to other opportunities even away from private credit “because we really have got to optimize that return-generating allocation.”
“I always get very nervous when everybody is pitching something,” said Hart. “It’s the worst possible time to go about doing it right, so I think we need to be very skeptical of everything that walks through the door. Everybody wants to talk about private credit, and that’s usually the worst time to do something right.”
When asked about future challenges at Exelon, Brown said “I don’t have any challenges after July 1st.” He is thrilled with the arrival of Hart as his successor.
Brown said he’s approaching retirement as something for which “you have to have the right portfolio of things to do, a diversified portfolio of things to do in retirement.”
Those include “front loading” a great deal of travel, likely sitting on a few boards and staying somewhat busy in the investment world on a part-time basis. There is only one thing he knows for sure: “No Chicago winters.”
