The 2016 Innovators

2016 INDUSTRY INNOVATION AWARDS

Public Defined Benefit Plan $15 Billion to $100 Billion

Pennsylvania Public
School Employees’
Retirement System

Jim Grossman, CIO
Harrisburg, Pennsylvania
Art by Thomas Fuchs

Want to work at a super innovative public pension? You’re in luck: PSERS [Pennsylvania Public School Employees’ Retirement System] is hiring.

Since taking over as CIO of the $50 billion pension in 2013, CIO Jim Grossman has brought roughly $6.5 billion in-house, increasing the amount of assets managed internally to more than a third of the total portfolio.

“Where we have the capacity and the competency to do so, where we believe we can do it as well or better than an external manager can do it—we have a bias to manage investments in-house,” he explains.

The shift wasn’t necessarily motivated by any concentrated effort to lower fees—Grossman says he has no problem paying talented active managers who can generate attractive returns. Instead, it’s about earning the highest net-of-fee performance. Some of the asset classes currently managed internally include fixed income, commodities, and risk parity. “Those are areas we feel we can do well in,” Grossman says.

But the internal/external divide isn’t just about where PSERS can do well—it’s also about where they have resources. Even if Grossman wanted to do away with external managers entirely, his current staff of 34 wouldn’t be nearly large enough to take on the entire investment operations. As a rule, public funds do not get to dictate their own staff budgets, and hiring additional people requires jumping through a few hoops. But Grossman is willing to jump through them for the good of the portfolio.

“If you look at the economics of what we’re already doing and how much money we’re saving by managing money internally, it’s clear we can save money and enhance the returns of the fund by having a larger staff,” he says.

It’s a persuasive argument—and one that got Grossman permission to take on a few more staffers next year. Prospective hires: Here’s what you need to know.

Grossman runs a leveraged portfolio, with assets split between equities, fixed income, real assets, absolute return, and risk parity. While risk parity makes up a 10% allocation, the risk-balanced approach is also applied at the total fund level. And the leverage is there to increase the risk and return profile of PSERS’ less risky diversifying assets.

“A lot of funds won’t consider using leverage,” Grossman says. “We view it as one additional tool in the toolkit for us in building a balanced portfolio.”

The pension fund also innovated in its new co-investment program, which provides access to private equity and private real estate deals at a low cost. “We get to evaluate deals first, and then potentially invest, which helps to increase the return profile of that portfolio,” Grossman says. “And it reduces the fee profile, because generally you can co-invest at no-fee, no-carry or half-fee, half-carry.”

It is a public fund job, which comes with its own constraints: low funding and high transparency, to name a few. But even while operating in the (sometimes very critical) public eye, Grossman has high conviction in his strategy.

“It comes down to how you think about time,” he says. “We think about it in decades, not months or quarters. And over time, the portfolio has done exactly what we’ve asked it to do.”

Amy Whyte

 

Public Defined Benefit Plan $15 Billion to $100 Billion Finalists

  1. Colorado Public Employees’ Retirement Association

    (Jennifer Paquette)
  2. Employees Retirement System of Texas

    (Tom Tull)
  3. Healthcare of Ontario Pension Plan

    (Jim Keohane)
  4. Iowa Public Employees’ Retirement System

    (Karl Koch)
  5. Ontario Municipal Employees’ Retirement System

    (Michael Latimer)
  6. Public Employees’ Retirement System of Nevada

    (Stephen Edmundson)
 
  1. Foundation
  2. Public Defined
    Benefit Plan
    $15b to $100b
  1. Endowment
  2. Public Defined
    Benefit Plan
    Above $100b
  1. Corporate Defined
    Benefit Pension Plan
    Below $5b
  2. Health Care
  1. Corporate Defined
    Benefit Pension Plan
    Above $5b
  2. Defined Contribution
  1. Public Defined
    Benefit Plan
    Below $15b