Revolving door at CalPERS sign of challenges for CIOs at public pension funds

For decades, the job of chief investment officer at a high-profile public pension fund has been one of the most sought-after roles in institutional investing.

More recently however, those positions have become a harder sell. Today's CIOs have to grapple with deepening political polarization, microscopic scrutiny in the public eye – both of their portfolios and decision-making — lower-than-average pay by Wall Street standards and a more complex investing environment in general. And data shows a revolving door can have real repercussions on performance.

While the broader public fund universe hasn't really been affected, in recent years the boards of some of the biggest funds, perhaps five to 10 in number, have become "a lot more politicized," noted Michael Kennedy, Atlanta-based senior client partner with executive recruiter Korn Ferry.

Kennedy, a veteran of numerous high-profile public fund searches, said such politicization has become an added hurdle to clear in luring away CIO candidates who may be enjoying good relationships with their current boards.

Or keeping them once they've been hired, for that matter.

Two months ago, the $446.7 billion California Public Employees' Retirement System, Sacramento, refreshed its claim to Exhibit A status on the public fund turnover front when CIO Nicole Musicco said she would be returning to Toronto for family reasons. She was only 18 months into her tenure, setting the stage for the giant fund's third CIO search in five years.

Other recent examples of public fund CIO turnover include Gaurav Patankar, who left his perch as the $1.1 billion Merced County Employees' Retirement Association's first CIO in October after just three months on the job at the California fund, citing an East Coast commute.

If family was the root cause of CalPERS' latest organizational turmoil, it might not have been the only factor at play.

Musicco acknowledged at a September investment committee meeting that during her year and a half as CIO she did not get universal support from the investment team, which nevertheless delivered on "very ambitious goals.""Not everyone is going to be open to change, which we've said … can often lead to some grumbling," Musicco said. "But that was such a small minority."

The continued turning of the political screw — often in the face of a glaring public spotlight — is a broader factor at work now as well.

Turnover at big public funds results from governance challenges, which in turn spring from the "political culture surrounding the pension plans, (the) motivations of elected officials and politicized boards of trustees," said Richard Ennis, co-founder of the investment consulting firm that became industry giant Ennis Knupp & Associates who has continued writing in retirement about fiduciary topics.

CalPERS has, unfortunately, become "the poster child for this syndrome," Ennis said, adding that "the best places to be a CIO are the out-of-the-way funds that get little attention."

Korn Ferry's Kennedy agreed that a lot of it "has to do with the boards" at some of the larger plans becoming more political, an aspect that has been picked up by the media, giving pause to candidates about looking — for instance — at opportunities in Florida where Gov. Ron DeSantis heads the state fund's three-member board of publicly elected officials.

The $237.5 billion Florida State Board of Administration, which includes the $185.7 billion Florida Retirement System, has been without a CIO for more than two years since Ash Williams retired on Sept. 30, 2021. The board has provided limited updates since the search for a replacement was posted in January of this year.

CalPERS may be the public fund best placed to attest that it's not easy to find a chief investment officer capable of comfortably juggling the varying expectations of board members, chief executives and stakeholders while managing roughly $450 billion.

Despite continued turnover at the fund, however, there are few signs executives there are re-thinking how they can go about landing an investment chief who'll be willing to stick around longer. Executives said they expect to hire a replacement early next year.

CalPERS has retained Dore Partnership, the same executive recruiter it used to find Musicco, and left its list of desired skills unchanged. On Nov. 15, weeks after the CIO position was posted on California's recruitment website and a news release advertised the CIO search, CalPERS' CIO search subcommittee met to take another look at the ideal candidate skills and characteristics. A few board members had some ideas.

The new CIO needs to be able to work collaboratively across different groups including the board, internal and external investment executives, and other stakeholders, said board member Lisa Middleton. And the new CIO should have political acumen, she said.

"We need to be upfront," Middleton said. "Whoever will be successful in our CIO role has to understand the political environment we live in and exist in and the political forces that are going to come into play and be in a position not to be a political player but to make sure we are acting wisely and not stumbling across obvious tripwires."

Subcommittee suggestions will be incorporated into the vetting process, a CalPERS spokesman said.

Dore two years ago showed that CIOs of big asset owners tend not to stick around for long. The average tenure of a group of 60 large asset owners, including pension plans, endowments and sovereign wealth funds, was 5.1 years, Dore's data showed. Dore has not yet updated the data.

Some 54% of the CIOs in that group, in which average assets were $158 billion, had been appointed in the prior three years.

That turnover doesn't bode well for performance, market veterans said.

"The longer the tenure of the CIO, the greater likelihood to get better investment performance," said Amy McDuffee, founder and CEO of governance consulting firm Mosaic Governance Advisors.

The experience of the country's two biggest public funds offer a possible illustration.

CalPERS earned a total return of 5.8% for the fiscal year and an annualized 7.1% for the 10 years ended June 30. By comparison, the $307.9 billion California State Teachers' Retirement System, West Sacramento – with Christopher Ailman at the helm since 2000 — posted a 6.3% gain for the fiscal year and 8.7% for the 10 years ended June 30.

The vast majority of public funds should have no problem attracting fresh CIO blood even if it could be harder for the biggest players to attract veteran investors or keep them in the fold amid growing pressures and frustrations, observers said.

There should be no shortage of candidates whose next logical career move is public fund CIO, but retaining veterans in those roles could become increasingly challenging, said Mansco Perry, who retired as executive director and CIO of the $127.9 billion Minnesota State Board of Investment in 2022.

With issues such as ESG, rapid growth of assets demanding ever more resources to safely manage portfolios and low compensation a persistent issue, Perry said it's not unusual to reach a point where the question becomes: If it's "not gonna be any fun, why would you do it?"

Such issues became more acute in recent years, Perry said, a factor in his decision to leave the industry two or three years ahead of the 2026 target he set at the time of securing his first job out of business school in 1976.

Angela Miller-May, CIO of the $49 billion Illinois Municipal Retirement Fund, likewise cited politics as a factor leaving the public fund CIO universe tending to disorder now.

"The job has gotten harder … the markets are more complicated, the stakeholders are very different, the line has blurred between my role and all of the different entities around me," Miller-May noted.

Against the backdrop of such distractions and frustrations, a love of investing — doing the job and accomplishing great things — is the ultimate escape, Miller-May said. But "when you can't do the job because of a board, or legislation or anti-ESG, or political divisiveness," turnover and burnout result, she said.

Steven Meier, the $255 billion New York City Retirement Systems' CIO, said that as a fellow CIO, he sympathizes with the person running CalPERS. It is "an impossible job. The fund is just so big."

He too feels a sense of mission running the pension system for five different sets of city employees — including police and firefighters, teachers and municipal workers.

"I love this job. I love seeing people stretch and grow. I've tried to incorporate that with teammates. And we promote from within."

But he recognizes that the staff pay has not kept pace with the market. His prior job at the $49.3 billion Connecticut Retirement Plans & Trust Funds paid more and had a fifth of the assets of New York City.

"We want to make this organization a career destination because it's a great training ground," he said.

However, retaining a CIO can be tricky.

"It starts with the person who will fill the role of CIO and knowing what the organization wants from the relationship," said Molly Murphy, CIO of the $21.5 billion Orange County Employees Retirement System, Santa Ana, Calif. "It's like a marriage. You can't go into it thinking you can change the organization. You have to go into the relationship thinking that if things don't change, I'm OK with it."

Before the board hires the CIO, board members should ask whether the person is aligned with their goals, she said.

"If I'm a CIO candidate, I want to know if the CEO and board measures me with (a) long-termism or short-termism lens," Murphy said." It often takes three years to move assets sometimes in a way that is meaningful."

Portfolio returns do not reflect the results of the CIOs efforts until between the three- and five-year marks, she said.

"If the organization has a short-termism view of success, you will be set up to fail," Murphy said.

In organizations in which the CEO and CIO are separate positions, the job of the CEO is partly to be a partner with the CIO to help the investment team produce investment returns, Mosaic's McDuffee said.

It's important that CEOs do not see themselves as investment experts because that is the CIO's job, McDuffee said.

The CEO needs to respect the lane of the CIO and share the leadership stage with the CIO to help the board do its job, she said. That's where the relationship can break down, McDuffee added. Another area where relationships can break down is when there are board members who delve into management and try to do the CIO role, McDuffee said.

Indeed, CalSTRS' Ailman attributes his longevity in the role, in part, to the consistency of the board.

There have been more than 100 different trustees on the board since Ailman became CIO but only five or six investment committee chairs, he said. What's more, when the 12-member board changes, the personality of the pension fund doesn't change, Ailman said. At CalSTRS, both the CIO and the CEO report to the board.

CIO jobs are tough, especially at larger plans, because "you're generally working in a fish bowl," he said.

"I'm clear. I'm not a politician. I'm a money manager," he said. With his team, he said he repeats their mission is to hit the fund's 7% expected rate of return on average.

CalPERS has had so many changes, Ailman said. In any kind of group activity, if there is that much turnover of the head coach, it's hard for the team to perform because there's a new direction and a new playbook, Ailman said.

If one looks back at prior CalPERS CIOs like Yu "Ben" Meng, Mark Anson and Russell Read, all of them had different strategies and themes. They all created units to do it and the next CIO dismantled them, Ailman said.

"Nicole said she had nine different things she wanted to work on ... but she didn't have the time," he said.

Erin Arvedlund and Rob Kozlowski contributed to this story.