In advance of his retirement, Andrew Palmer, CIO of the $70.4 billion Maryland State Retirement & Pension System, has readied the pension fund staff with the tools needed for when the pension system reaches $100 billion in assets.
Palmer took the helm of the Baltimore-based pension fund in July 2015 after serving as director of fixed income and then-deputy CIO for the $70.2 billion Tennessee Consolidated Retirement System, Nashville, since 2008. In January, Palmer announced he will retire at the end of the pension fund’s current fiscal year on June 30.
In an interview at the Global Alts 2025 Conference in Miami Beach, Palmer said that when he arrived in Baltimore, the investment program was sophisticated, but the investment team was not built to manage the kind of very diversified portfolio that would be needed for a pension fund that actuaries estimate will eventually hold assets well exceeding $100 billion. At that time in 2015, the pension fund had just under $45 billion in assets.
“When I looked at that future, I thought how do I start positioning this organization to meet the needs of that organization? Part of that was to create the environment where we could have a more resilient team,” said Palmer. The small internal investment staff also limited the number of external managers and types of strategies they could utilize, requiring staff to allocate significant amounts of money to relatively broad strategies.
“So, we really had organizational risk from just the paucity of people in the group, so we worked with the board and the legislature to create more flexibility because we were kind of under state restrictions in terms of personnel growth,” Palmer said. “And I would say the pension fund grows at 4% or 5% a year, and the state budget grows at more than 2% a year, and there’s just difficulty maintaining the pension side of resources when it’s constrained by the state.”
Palmer said the conversations were successful and he and his staff were able to work with the board to create positions and build out the team. It took several years before Palmer was free to implement the expanded investment staff, which has grown to 53 professionals today from 23 professionals in 2019, he said.
The larger staff gives the pension fund the ammunition it needs to grow.
“What that’s allowed us to do is that we’ve been able to expand the types of things we do,” said Palmer. “Our long-term vision is to improve our output by improving the implementation, which is both trying to drive higher returns, managing risk better, and then lowering costs. The bigger team has allowed us to bring some of the assets in internally to manage directly.”
As of Sept. 30, the pension fund had $14.9 billion in assets managed internally.
“Most of that is all passive, or very nearly all passive, but the discipline around building portfolios and managing it through time translates to ... (how the team selects) outside managers,” he said. “So the team is much stronger, and we’ve brought assets in...that’s helped lower the costs.”
While more than doubling the size of the investment staff in five years represents a very rapid pace of change, Palmer said, that has broadened out the type of investments: the pension fund has recently created a private co-investment program, which has also helped lower costs.
For its most recent fiscal year ended June 30, the pension fund returned a net 6.9%, above its benchmark return of 6.3% for the period. For the three, five and 10 years ended June 30, the pension fund returned an annualized net 2.3%, 7% and 6.3%, respectively, compared with their respective benchmarks of 1.6%, 6.1% and 5.7%.
As of June 30, the pension fund's actual allocation was 30.7% public equities, 21.6% private equity, 16.5% rate-sensitive assets, 14.2% real assets, 8.9% credit, 5.8% absolute return, 0.4% multiasset strategies and the rest in cash.
Palmer said in the five years since legislation and then the board granted the authority to change the investment staff, 90% of the plan’s assets have outperformed their benchmark returns.
“The mix of assets we have right now is because we have a lot of private assets and not much U.S. stock, so we haven’t captured as much of the upside of a 60/40 portfolio, but we think we’re moving through time at a much more steady pace and will wind up in the same place or better over time,” Palmer said.
Palmer has not yet decided how he’s going to spend his retirement, but for now, he is making sure the pension fund has all the pieces in place to handle a smooth transition.
One key step was the hiring of a second deputy CIO last August. Thomas Kim had been deputy CIO of the Tennessee Consolidated Retirement System, which he joined in 2010 as a senior portfolio manager on Palmer’s fixed-income team there.
Kim now works alongside fellow Deputy CIO Robert Burd, providing strategic direction and counsel across the entire investment portfolio.
“First, it (the hiring of Kim) allows us to be more effective at managing the team and managing the asset classes,” said Palmer. “And second, it gives us a very strong team for if there's any kind of gap. Either one of those folks are, or both of them are, eminently capable of taking over this role. So for a smooth transition I want to make sure that those two people are prepared and get me to transfer more of the things that I do to them.”
Palmer said his other project before retirement is to complete an asset-liability study, primarily because 10 of the 15 board members are new and have not gone through an asset-liability study before. The last one was completed in 2021.
“That goes to really evaluating our overall returns, which have been muted in the last few years relative to just a 60/40 portfolio, and thinking about what risk levels this board wants to take, helping them really. That’s a hard question: How much risk do you want to take?”
He said it’s important to help through the period leading up to his retirement, to help the board evaluate how much risk it’s willing to take to achieve higher returns.
