"If interest rates go much higher, that would increase the risk of a systematic credit event and if they head lower, that would work against the effort to contain inflation," he said.
Domestic equities have "performed quite well in recent years but those gains have been largely driven by a few tech stocks that now are richly valued," Veal said, adding "we have made some organizational moves such as enhancing our investment teams to better equip the organization for these market conditions," he said.
That said, for the first nine months of this year, ERS' best-performing asset classes for its $36 billion defined benefit plan have been private credit, with gains of 12.7%; public equity, 11.1%; and infrastructure, 6.9%, Veal said.
"Not surprisingly, given the market conditions and after many years of strong performance, in 2023, the ERS public real estate portfolio was down 4.2% year-to-date Sept. 30, with private real estate down 2%," said Veal.
When asked about changes at ERS, Mr. Veal said "the biggest changes they have made recently have been around organizational structure rather than investment strategy per se."
Veal said the fixed-income portfolio was "split into credit and rates teams to allow for specialized management and to deploy cash more fully in a rising interest rate environment. The rates team also adopted the cash portfolio and the trading desk which has become the Treasury and Trading operation trading."
When asked about ERS' strategic allocation, Veal said "the only recent change to the strategic asset allocation was an increase to the maximum allocation to cash from 3% to 10%," noting that "we used that flexibility to maintain a cash position totaling 6% to 7% of the trust (defined benefit plan) over the past two months, which has added significant value given how weak global equity markets have been," said Veal.
Like many organizations, the ERS investments division saw "an elevated amount of turnover in 2022 that saw a handful of employees retire or move on to more senior roles with other organizations," Veal said, however noting "that the team has been stable in 2023. ERS is a great place to work … as an organization, ERS is committed to market compensation, rewarding performance, professional growth and career development."