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Michael Latimer Chris Ailman CIO CalSTRS

Leading the 300 Club and the second largest pension fund in the United States

CIO: The CIO 300 Club was established to address what a group of very accomplished investors see as fundamental issues that need to be rethought in investing and markets. Tell us about them, and what the name of the group means?

Ailman: The 300 Club was formed in 2011 by Saker Nusseibeh, CEO of Hermes Investment Management, in response to the 2008 global financial crisis. He and the Hermes board felt that the institutional investor voice was missing from the market commentary. The public hears from Wall Street and the media, but not the actual buyers of financial products. The idea was that in periods of extremes, investors with a longer-term perspective could highlight the impact of the extreme outlier periods. As institutional investors, we believe we see things that are otherwise missed by the mainstream.

The group has issued white papers on myriad issues and topics challenging current financial wisdom and investment theory. 

The name of the group refers to the legendary 300 Spartans, who in 480 BC at the Battle of Thermopylae, held off the numerically superior invading Persian army. The story of the 300 is a symbol of what can be achieved by a small band of high-conviction individuals against overwhelming odds. It’s important to note we aren’t exactly willing to die for our convictions nor are we exactly as physically fit as the Spartans in the movie.

CIO: The group expanded to North America this year, and you’re leading the chapter. Why the expansion now, and what do you hope to accomplish in the near future. Who should join and why?

Ailman: The group is primarily European, with just three CIOs from the US. At the 2016 meeting, we wanted to expand the group for a global reach, so we decided the first move would be to North America. I was the only North American present; therefore I got tabbed to lead the initial outreach effort. We have held three meetings. We are at nine members and growing. The membership is focused on chief investment officers from long-term investors, both plan sponsors and money managers. I believe individuals should join to help advance long-term asset owners’ perspectives, push others to tackle uncomfortable issues, and probe fundamental questions about the very foundations of the investment industry and investing in global financial markets.

CIO: CalSTRS had another year of strong returns, and long-term returns have been very impressive for the organization. You recently mentioned having a long time horizon as a key advantage that an organization like CalSTRS has. You can wait out periods of high valuations. What are other key drivers of your returns?

Ailman: Investment performance can always be explained first and foremost by asset allocation. Our board picked the right mix; we were smart and nimble in its implementation. I also firmly believe our internal culture is a key driver of our long-term investment success. I often tell staff: money managers’ work culture is a leading indicator and performance (alpha) is a lagging indicator. The challenge today is to keep our focus on the long-term, single objective of beating our actuarial assumed rate of return—frankly nothing else matters compared to that goal.

Looking forward, a huge challenge to generating returns is keeping costs and fees from eating into our returns. As our portfolios go more global and complex, to generate returns, costs can eat away everything we hope to gain. Whenever Wall Street or London (FTSE) creates a new product, it always seems to start at the highest cost structure.

CIO: CalSTRS believes firmly in one-share, one-vote, and is opposed to dual-class shareholding firms. Is it a detriment to be excluded from key innovators like Alphabet and Facebook for this reason?

Ailman: We absolutely believe in a democratic form of ownership. If these firms want our capital—and by default, as owners, we have to share in the equity risk of the business—you bet we want a vote in how the company is structured and top management rewarded.  We don’t want to run the company; however we want the right to nominate and vote on board directors who will independently oversee management and hold it accountable. I know it seems unfathomable to Mark Zuckerberg, but CalSTRS will likely own a stake in his company long after he retires. I tell CEOs as long as there are public school teachers in California, we will own a slice of their company. In my view, the capitalistic system operates best when the equity stakeowners have a voice in the business enterprise. In our case, we have a longer-term perspective than either management or the board of directors.

CIO: Is the scale and size of a fund the size of CalSTRS a help or hindrance to generating strong returns?​

Ailman: Not surprisingly, it’s both. We can take advantage of the economies of scale, but that also limits our ability to be nimble. In today’s institutional market, we’re no longer a mega fund—not with GPIF (Government Pension Investment Fund-Japan) at $1.4 trillion, and Saudi Arabia coming onto the scene. While CalSTRS is number two in the US, I wonder if we even rank in the top 25 of global institutional investors anymore.  Plus, we feel and see the increased competition across the globe for private investments and investment managers’ resources.

Thanks to our size, we can very efficiently run money internally—saving tens of millions in fees. But, we also realize that small allocations to specific investments barely move the return needle at our total fund level. Collette Chilton, CIO at Williams College in Massachusetts, can make a $100 million or $250 million investment, and it will impact her results; we need to allocate and make investments 10 to 20 times that size to have an impact. I can’t even imagine what it’s like to be Hiro Mizumo (CIO at GPIF).

CIO: What risks are you seeing for the remainder of the year, and what strategies can CIOs use to protect themselves against those risks?

Ailman: We are looking past calendar year-end and looking into 2018, 2019, and 2020.  The US economy can continue low and slow for some time, however, most economic services feel the US is overdue for a recession—at some point. Not surprisingly, they disagree as to the probable recession’s trigger and severity. Everyone just feels we’re overdue.  Yet CIOs know the economy doesn’t follow a neat clean timeline. There is so much uncertainly out of Washington and huge global risks around the world.  Europe looks like it’s in recovery, but it has to weather Brexit, and we still haven’t resolved Greece (remember Greece?).

The world seems so volatile, but the markets don’t reflect it. Very odd. These are difficult times, but frankly, it always feels that way, and it always feels like ‘this time’ is different.

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