That first staggeringly large OCIO win and the liftout of BAE System’s investment team reflected GSAM’s growing emphasis on an increasingly interesting part of the market, said Christopher Keogh, GSAM’s global co-head, institutional client business. That market consists of about 50 corporate pension plans, both in the U.S. and in Europe, oftentimes closed or frozen with funding ratios of 90% or above and holding $20 billion or more in assets, Keogh said.
“There’s clearly an increasing interest from CFOs and treasurers to look at what is the best way to service those plans and maintain robust fiduciary duty at the same time, making sure that it’s in the best place it can be,” Keogh said.
Part of that is recognizing that the highly sophisticated and exceptional in-house investment staffs that have been managing these corporate plans don’t necessarily have the core investment and risk management experience and resources required as the plans move further into their derisking glidepaths as they become fully funded.
That means a greater share of assets go into fixed income and away from growth-oriented assets, and less for some team members to do as that process continues.
“There's a perception in the marketplace that we take on these employees as like a cost of doing business. Nothing could be further from the truth,” Keogh said. “Our model from the beginning has been if we take the whole team, the transition is likely to be much smoother. We're going to have much better knowledge of the idiosyncrasies and complexities of that plan and its needs. We're going to therefore help fulfill the fiduciary obligation that still sits at the corporate level in a way that's much more profound and well managed than if we didn't have those teams."
“And then we believe potentially — and there’s arrogance in this — but we really believe that the growth for people’s careers having come into Goldman Sachs is robust,” he said. “They will start inside Goldman Sachs, working on the plan that they have always been working on, but the growth opportunities for people's careers are immense, from the CIO level down to someone who's just been working for three years as an investor within the plan.”
That means being able to develop the talent acquired through the OCIO deals. One example comes from the recently acquired UPS team, said Alexandra Wilson-Elizondo, partner, co-head and co-CIO of multiasset solutions at GSAM.
“One of the individuals that came in with the UPS mandate has a strong background in credit,” Wilson-Elizondo said. “In our dynamic asset allocation process, we have an asset class group that looks at relative value across credit. I highlighted to our head of research (that) we would be amiss to not have this person be part of that asset class group, to be impacting more portfolios than the one that they just currently sit on. This person is now co-running the asset class group. Their expertise has been a tremendous addition. It’s impacting other parts of the business such as our sovereign wealth business where our lower-risk mandates invest heavily across the credit complex.”
The opportunities that GSAM presents for his investment staff are part of the appeal for Ernie Caballero in leading his team in the new setting at Goldman Sachs Asset Management, where he now has the title of managing director, asset management.
He and his staff joined GSAM on Sept. 1, almost exactly 35 years after he joined UPS, where he served in a variety of roles including global treasury director, vice president of strategy for emerging markets and CFO, Europe region, before becoming CIO of the pension fund in March 2018.
Caballero was particularly struck by how extremely well the transition to GSAM was managed. “It’s like an M&A transaction. You're buying something. You have to integrate it, for lack of a better term, but if everybody's growing in the same direction with the same set of objectives, that really makes the transition, honestly, a nonevent, and that’s what it was for us,” Caballero said.
Cabarello worked on various M&A deals during his years on the finance side at UPS and he compared the OCIO transition to those types of transitions.
Caballero said it’s rare to see such a really good transition with “a lot of delicacy in it” given the complexity of transferring assets from multiple pension plans that are both open and frozen as well as moving the investment staff.
Now that the assets are being managed at GSAM, Caballero said they can now do what they were doing at UPS, but in a “much bigger way, with a broader scale and a global reach.”
“We were a pretty sizable team (for a pension fund), but still, we (were) only a team of 22 including me when we moved over. You have limitations there,” he said. He said his team has access to resources at Goldman Sachs they never would have had at UPS.
While the access to the global scale that GSAM provides has brought about significant benefits for the UPS investment team, the portfolio has brought GSAM its own benefits.
Timothy Braude, partner, co-head of multiasset solutions at GSAM, said that integrating the UPS portfolio brought about two things that people in the organization got very excited about.
“Number one is they've got a very interesting and innovative (private markets) portfolio. So just being able to sort of work through that and have them engage with our external investment group, our (private markets) team has been really, really interesting. They (also) had some interesting co-investments in the portfolio. So there's a few things that have been quite interesting on that side of things,” Braude said.
Aside from strategies already utilized within the UPS portfolio, Braude said his team has always been focused on developing innovative solutions for clients, which they’re integrating into the UPS portfolio.
He said GSAM ask: “How do we ensure that we are finding alternative sources of return and diversifying what we believe are the two most consistent return drivers, which are the market cap and rates?”
The relationship is proving to be symbiotic for both the UPS portfolio and GSAM.
“We've got a number of alternative sources that we put in our portfolios," Braude said. "We do a bunch of quantitative downside risk hedging, and they have a pretty interesting portfolio in those two areas."
“Being able to integrate that into our platform, especially given some of the research that we were already doing on some innovative alternative risk premium strategies, it’s just super complementary, and in some ways accelerated the research that we were already doing,” Braude added.
As of Dec. 31, the actual allocation of UPS’ U.S. pension plans was 47.2% fixed income (down from 58.9% the year before), 16.8% equities (down from 23.3%), 15.6% private equity/private debt/other (up from 14.2%), 13.7% cash (up from 2.3%), 6.4% real estate (up from 5.9%), 4.9% hedge funds (down from 9.1%) and -4.6% derivatives (up from -13.7%), according to the company’s most recent 10-K filing.
