Q: What are your initial thoughts on the role?
A: I've got lots of thoughts about things I would like to work on. One of the things I've really liked has been the work that the internal culture club has done.
Within our investment office, (the club) was set up after an engagement survey. And the question was, how can we improve engagement? A group of people within the team got together and thought about things they could work on. How do we welcome new employees? How do we go out and understand what the rest of the team's doing?
That's been really encouraging because there's been a buzz around the work that's being done. So when you see that, you get quite encouraged about future cultural developments, breaking down barriers, collaborating and so on. I want to keep building on that.
I do want to think about how we develop our talent to think about succession development, looking at that training and how we get people into strong positions to be potential successors. One of the big advantages we should have as an organization is the amount of knowledge we have internally, the capability we have with our people, the number of external contact points we have. So if we can pass all that information and use it, it should be an advantage for us. I'm also thinking about how we can improve some of the processes.
Q: Such as?
A: Well, one that stands out is on the technology side.
I think it'd be fair to say historically we have followed probably more of a best of breed (approach) in terms of getting applications and systems for probably siloed areas. But to fully harness the benefits of what we have across the institution, we need to have a better whole-of-portfolio visibility. So we're thinking about how to do that. It's one of the big initiatives we have at the moment. We will be spending a lot of time and energy thinking about how to improve our data and analytics and how we can use the information that comes from that capability.
I'm also spending a lot of time thinking about, of course, the portfolio, how we construct the portfolio, how we think about the portfolio. And we're embarking on a regular exercise, which is our asset liability management exercise. At the upcoming board meeting we will talk some more about that.
Q: What’s involved with this exercise?
A: There are many steps to it. And I guess there's a way that we did this in the past in terms of looking at capital market assumptions, looking at what we thought for asset classes return, looking at the sort of return we needed to make the fund sustainable. And we went through a fairly consistent process. We did that almost four years ago and we had an interim check-in.
We're going through a somewhat similar process. What I want to do now is think about, well, what can we do to take that process a step further? I mentioned the benefits of collaboration and all the information we get given our scale, given all the touch points.
I'm definitely thinking a lot about how we can take a whole portfolio approach.
I’m also thinking a lot about how we think about risk in terms of the risk appetite and the trade-offs. When I speak to the board in November, we'll go through some of those things and it's really just a high-level framework discussion, which will set the scene for the year ahead. And ultimately that will end up with us deciding on an overall risk appetite and a portfolio.
Q: Has CalPERS been too conservative with its risk appetite?
A: That's a hard question to answer because it depends on so many different considerations. Quite often one can sit back and say, "Oh, if we'd had more risk on, we would've generated higher returns." But you don't know that in advance, so you can't really look backwards with hindsight. You have to think about what stakeholders feel comfortable with.
To me, that's the true test. And when you're thinking about risk appetite, you're thinking about not just the amount of market risk you take. You need to think to think about how you take it, how much you invest in liquid assets, how much you invest in private market assets and so on.
Q: Is the end result to improve the funded status (now at 75%)?
A: I think in the end, yes, you want to improve the funded status, but of course there are trade-offs. If you take a lot of risk, yes, you may generate higher returns, but you may also increase the likelihood that the funded status is lower. So you need to be able to trade off those different considerations.
And it depends partly on your overall risk appetite, it depends on your horizon as well. And there are many other things as well that you need to think about.
Q: Of course. So if we can go back a bit: Marcie Frost has been candid about the challenges of this job, specifically that it requires resiliency and grit. How do you stay on track in difficult situations or when things aren't going to plan?
A: You need to find ways to step out of the space to give yourself that perspective because if you are just focused on the job, it can become more consuming. For me, I like to do things that are maybe quite different from the day-to-day. I like to experience things that are new to me. I also like to do very simple things like just walking around and listening to music or reading. I think also historically I've been in quite a few different settings and some of them have been potentially quite stressful and sometimes dangerous.
Q: Dangerous?
A: Well, when I worked for the International Monetary Fund, I was an IMF resident representative setting up the office in Tajikistan. And at the time, Tajikistan (a former Soviet republic) was in the midst of a civil war. So I mean dangerous in terms of there being armed conflict, bomb blasts and the like. When you talk about resilience, sometimes it helps to think about perspective. And I think about that.
Q: How have you gone about getting your arms around the investment team, which is a little more than 300?
A: Ideally, I would get to meet everyone individually and ideally, I would remember their names, but of course it's not that easy. We're spread over a couple of floors and I've deliberately wanted to meet a broader range of folks. I have fairly regular meetings, obviously, with my direct reports, but also people who are maybe one report removed. I will also have occasional catch-ups with others.
When I started my previous role, it was a somewhat similar challenge but at a smaller scale.
When I went into that role, I had a team of around 50 people and one of the first things I did was to go out and actually have coffee with all of them. So the challenge I gave each of them was, find me a good place to go for coffee. Here it's much more difficult. We're not in the center of town and also we've got 300 people, so I can't really do that. But I am looking for ways to just engage with broader team members across, as I say, social activities, wandering around and having sort of formal catch-ups with people. I'm working through that, but it'll take a long time.
Q: When you came onboard, what were your priorities?
A: Well, there were some things that I thought were a little unusual in terms of some of the structure and responsibilities.
One of the first things I did was to move all of the operating and enabling functions under Michael Cohen, chief operating investment officer. So I moved investment operations, investment control and technology to him. What that also did was to free Dan Bienvenue, (formerly interim CIO before resuming his deputy CIO duties) up a bit, and Dan — obviously great acting as CIO for an extended period — but he'd also taken responsibility not just for those functions that I had mentioned that had gone across to Michael, but was also looking after the liquid market activities. It was really just too much. And I wanted Dan to be able to focus much more on the investing side of things. So for me, that was an obvious thing to do.
There are other fairly simple things and you don't see those until you arrive. Some relate to just the way we do things operationally. I was quite struck by the number of meetings we had, and so we scaled back some of those. I was also struck by how some processes have been around for a very long time and we hadn't necessarily embraced maybe some more efficient ways of doing things. So we're using SharePoint and Teams much more often.
And I’ve worked on information barriers. We use information barriers, but we had them operating in a way where there were physical barriers put in place, which hindered collaboration. So we worked quite hard to think about how we could get the right balance between that protection of information and collaboration. So I've made some moves in that direction as well.
For instance, some people couldn't come up to this floor very easily or teams would find it hard to actually physically talk with one another. So you do want obviously collaboration between let's say your public market, fixed-income people and your private debt people. And that was perhaps more difficult with those physical barriers in place.
Q: As a global investor, what risks are you thinking most about right now?
A: I think mainly about the internal focus on the portfolio, the risk appetite, the horizon, because there are always background risks when you think about the global environment. Nowadays it's probably more popular to think about the geopolitical risks because people often highlight those. Historically, those risks haven't mattered so much for market outcomes or for portfolio outcomes.
When they have mattered is where they have had an impact on supply. If you think back to the 1970s, they did have an impact when there were changes in the oil markets. We're in a situation now where again, those geopolitical risks can potentially have those sorts of supply impact. We need to also be thinking about the macro environment. And we've had this period, very long period where we've had very low inflation and very low interest rates.
And then with the COVID-19 shock and with the response to that on the monetary and fiscal side as well as the supply constraints, you had inflation picking up quite sharply. And, of course, central banks have acted to bring that inflation back down. The question, of course, is that a permanent downward move or are there risks of further inflationary shocks?
There are questions around where interest rates should be. Partly that's a function of the inflation outlook. You might also think it could be a function of debt loads and so on. But that's quite important for the pricing of assets. What we’ve seen through time, people spend quite a lot of time thinking about portfolio compositional structure.
If you go way back, people thought it was fairly simple just to set up a portfolio of equities and bonds and you would have had a reasonably diversified portfolio. That became less true when interest rates were very low. Interest rates are a bit higher now. There’s still that question as to how you construct a portfolio that gives you sufficient resilience to a range of possible scenarios. So think about about pricing of asset classes, think about the weight of capital, lots of things to think about.
Are we getting paid enough for locking up liquidity? Those are some of the high-level considerations.
Q: Have you got answers to all that?
A: Not definitive. Some of these things you're never going to get answers to. So when you're thinking about what could happen, one of the most important things to reflect on is the possible paths and how you would feel if you went down in those paths because you can't construct a portfolio that is going to be resilient to all those paths.
