Whether their CIOs are relatively new to the position, or veterans of many market cycles, public pension funds told Pensions & Investments about their efforts to be proactive and try to ensure they're ready for a bear market or other such crisis.
James H. Grossman Jr., CIO of the $58 billion Pennsylvania Public School Employees' Retirement System, said that before the global financial crisis, the Harrisburg-based plan "had such a high concentration of equities ... to generate the type of returns we needed to offset limited employer payments."
Just prior to the crisis, PennPSERS allocated about 70% to equities and 30% to fixed income and real assets. When the crisis hit, the plan's assets fell to $42 billion from around $70 billion due to its concentration in equities, which lost 50% of their value, and the negative cash flow of the fund. PennPSERS wound up selling 8% of its assets to meet its cash-flow needs.
"Essentially, having most of our eggs in one basket entering the financial crisis led to large investment losses," said Mr. Grossman, who has been CIO of PennPSERS since 2014. "The large losses, coupled with our excessive negative cash flow, exacerbated the asset decline of the fund."
Knowing the plan could not afford a repeat of that drawdown, PennPSERS has since moved to a more balanced portfolio construction to reduce volatility.
"So today, we've diversified our baskets so if one egg is not performing well in a period, we hope the others are performing well," Mr. Grossman said in an email. "Still, we understand our diversification will not generate ultra-high returns in an equity-fueled bull market like we've been experiencing. Conversely, we don't expect to suffer as much if or when the bull run ends as it did briefly in December 2018."
Looking forward, Mr. Grossman said he has concerns over the depth and length of a future downturn.
"We still have negative cash flow, which can erode assets over a prolonged market downturn," he said. "Our concern is that the next downturn will be both deeper and longer than previous downturns, which will put stress on our employers for additional contributions at a time when tax revenues are challenged."
He added that with interest rates as low as they are, the diversification benefits from the fixed income within the portfolio "won't be a great as in previous drawdowns."
Laurie Martin, recently appointed CIO of the $35.9 billion Connecticut Retirement Plans & Trust Funds, Hartford, said in an email that the state has "put in place new asset allocations and a risk posture to ensure we can take advantage of all differentiated sources of return in the future, through any cycle." She cited implementing greater diversification, decreasing its exposure to global equities and increasing its allocation to fixed income as ways the pension fund is mitigating risk.
Knowing that the next crisis won't be the same as the last, Ms. Martin stressed the need to be nimble.
"We know every downturn is different, so as long-term investors, we have to plan for the unexpected," Ms. Martin added. "That means prudently building a diversified investment portfolio and always stress testing to ensure we are remaining true to our long-term targets."
Connecticut Treasurer Shawn T. Wooden appointed Ms. Martin as the CIO in June.
One CIO who was there during the global financial crisis told P&I what he did to better prepare for uncertain times. David Villa, CIO and executive director of State Wisconsin Investment Board, Madison, said the $111.5 billion Wisconsin Retirement System adopted a risk-sharing structure that puts more of the return risk on participants.
If the plan earns more than 5%, employees receive an extra benefit. If it earns less than 5%, they get a smaller benefit. And that excess goes into an annuity on top of their base benefit. The cost-of-living adjustment has to be earned.
"What we learned in the crisis is we need to build a race car for a race track that is 20% tight curves and 80% straightaway," said Mr. Villa, who has been CIO since 2006 and executive director since 2018. "And our race car tends to go slower during the straightaway and faster on the curves."
Wisconsin's plan, which Mr. Villa describes as "very liquid," was allocated to about 66% equities (risky) and 34% fixed income (safe hedges) in 2009. Now, through leverage, it's 64% equities and 46% fixed income.
"That's my race car that goes fast on the curve and slow on the straightaway," Mr. Villa said.