Chad Myhre Portfolio Manager, Public School & Education Employee Retirement Systems of Missouri
Chad Myhre
(Art by Victor Juhasz)

“We look at Chad as an alpha generator in our office. He is willing to explore complex investment ideas and ‘out of the norm’ investment managers to unleash alpha. Chad is a great team player that adds diversity of thought to our investment group.”

— Craig Husting, CIO, Public School & Education Employee Retirement Systems of Missouri


While he’s only been at the Public School Retirement System of Missouri for a year, Chad Myhre brings a wealth of knowledge from his eight years with the State Employee’s Retirement System.

A hedge fund background may give him a competitive edge, but the 35-year-old portfolio manager says teamwork is what it’s really all about. He is currently building a $2 billion domestic equity portfolio with plenty of collaboration from both long-only and long/short managers. Although alpha generation is getting tougher by the minute, Myhre’s “can-do” attitude suggests that when there’s a will, there will always be a way to success led by a talented team with an excellent governance structure.


CIO:
 What are the accomplishments you are most happy to have achieved recently, and why?

Myhre: I’m always a bit reticent to answer questions like this for a couple of reasons. Firstly, this type of question implies that investing isn’t a team sport, which it clearly is. Every time I’ve developed new processes to more effectively underwrite prospective managers and monitor existing ones, I’ve enlisted the help of others to provide feedback and work out the kinks. Likewise, even as a one-man team managing the active portion of the hedge fund portfolio for my prior employer, I always sought out additional views from my colleagues in hopes of identifying risk factors I may have overlooked. Secondly, unlike most competitive endeavors where confidence works in your favor—think athletics or the performing arts—capital allocation is somewhat unique in that overconfidence has a way of working against you by leading to lower-quality work and an inability to admit mistakes. I, therefore, see pride as counterproductive to future success. In addition, I also think it makes you a less enjoyable person to be around.


CIO: What would you be most excited to accomplish in the year ahead, and why?

Myhre: I’m currently in the process of building a $2 billion domestic equity portfolio from scratch that will follow a personal philosophy of concentration and sector expertise utilizing both long-only and long/short managers. The goal for the year ahead is to fully populate this portfolio while simultaneously building a risk framework that is needed to track and hedge out unintended exposures. Even if this goal is met, I still won’t chalk it up as an accomplishment, as I fully acknowledge that anyone can build a portfolio of managers. The difficult part is building a portfolio that adds value. Unfortunately, I won’t know if any value has been delivered until I have had the benefit of a proper look back period. And even at that point, it will have been a team effort.


CIO: What’s the most rewarding aspect of being an asset owner?

Myhre: I don’t take for granted how absolutely enjoyable it is to connect with my peers across the allocator community to share ideas and war stories. For as much as we all like to complain about the ubiquity of ego that resides among asset managers, I see very little arrogance among allocators. The ability to pick up the phone and get a second opinion from another allocator or to float an idea past a group of friends at a conference is not only incredibly beneficial from a due diligence standpoint, but also immensely enjoyable. I’m a firm believer that it isn’t what you do in life but rather who you do it with. I very much appreciate the opportunity to interact on a regular basis with so many wonderful people.


CIO: What’s the most challenging?

Myhre: One of the greatest challenges we all face is the increasing difficulty of alpha generation. As retail investors continue to move towards passive investing, the allocator community we are all a part of is slowly becoming the market. So, while technically not 100% true, alpha is, by and large, a zero-sum game. Therefore, we are essentially playing a game of poker where the weak hands are leaving the table and the asset managers we hire are collecting a healthy rake. For those of us who are going to continue to play this game, we need to be crystal clear as to why we have an advantage. Unfortunately, that advantage usually involves a significant tolerance for pain. If you think about the Fundamental Law of Active Management, the value a manager delivers will be dependent upon her level of skill and the number of bets she makes. The implication is that we should allocate capital to highly diversified managers with short time horizons, so that even if that manager’s hit rate only marginally exceeds 50%, the law of large numbers will lead to a positive outcome. The challenge is that as developed markets have become much more analytically efficient, the small edge that highly diversified managers have historically held has largely evaporated, thus forcing concentration and/or sector expertise. In addition, informational efficiencies have forced fundamental managers to increase their holding periods, leading to lower levels of turnover. As a result, allocating capital to fundamental-focused managers will continue to be accompanied by lengthy periods of underperformance that is little more than noise. Intestinal fortitude and communicating proper expectations to stakeholders are now pre-requisites for successful implementation.


CIO: What are you most hopeful about in the future of the industry?

Myhre: I’m hopeful that our industry can continue to carry out its mission of positively impacting lives. This starts with an ability to attract talented individuals who are drawn to this business by a sense of mission instead of a compensation package. As both of my parents were public educators, I personally take a great amount of satisfaction knowing that any residual value I create accrues to the teachers that have served the children of Missouri. Every time I speak with my colleagues representing charitable foundations, I’m reminded that some of the best minds in the business work for organizations that are supporting very important social causes. It would be a complete shame if that did not persist going forward. I’m also hopeful that by carrying out our jobs of allocating capital to its most productive use, positive externalities will continue to result. For example, as developed markets have become more efficient over time, intrepid capital allocators have shifted their efforts to less-efficient and less-developed geographies. Not only have these investments led to attractive returns, they have also led to better-functioning capital markets, higher levels of productivity, and an increase in living standards.


CIO: 
What are you most cautious about?

Myhre: I’m fairly confident that the performance of every public pension plan going forward will be driven by two main factors: employee talent and the governance structure in which they operate. While I am hopeful that the sophistication of allocators will continue improving as the younger generations see this side of the business as an attractive career destination, I have a fair amount of trepidation around the governance outlook. In speaking with my peers, I have become aware that not every organization has the benefit of an engaged, patient, and supportive board as we have here. This business is far too competitive and the stakes are far too high for any decision to be made for non-investment reasons. I fear that these sub-optimal decisions will become much more prevalent after the next economic downturn, when board members will compute their theoretical funding ratio had they had the same return as a higher-performing peer. This horse race mentality could lead to myopic decision-making in general and, more specifically, performance chasing at the asset allocation level. As increasing scrutiny is placed upon public pension systems, headline risk increases, and the incentive to fail conventionally becomes much stronger.


CIO: As a leader, what are the most important aspects of the industry you hope to change over your career?

Myhre: Allow me to respond with a thought experiment. If the Norwegian Sovereign Wealth Fund took its $1 trillion corpus and broke it into 50 separate $20 billion plans (each employing its own investment staff to scour the investment universe for alpha opportunities), would the aggregate performance of all 50 plans be better than the current fund? My guess is no. I’m not implying that we should start consolidating plans for myriad reasons. I am saying that we need to stop looking at our peers as competitors and instead look at them as collaborators. The way we collectively approach asset management is a huge dead-weight loss that none of us can afford. I recently engaged in some due diligence meetings with a colleague representing another system. Not only were we able to share insights with one another after the meeting, but we were also able to save the portfolio managers we spoke with a considerable amount of valuable time. While I acknowledge that this isn’t a unique example, I think it demonstrates how easy it is to work together to derive better outcomes.

CIO: If you had one piece of advice for your peers, what would it be?

Myhre: Spend more time seeking the truth and less time trying to win the debate. I know this sounds like obvious advice, but anecdotal evidence indicates that this is a relatively rare mindset and for some very understandable reasons. We operate in a competitive industry where significant personal sacrifices are required in order to stay ahead of the pack. Those that have made these sacrifices will seek validation in multiple ways, but perhaps none will be quite as viscerally gratifying as proving that they are right during a debate. Conversely, being proven wrong can be an embarrassing experience, especially when it occurs in a group setting. These feelings are especially acute considering the fact that most of our jobs are predicated upon our abilities to judge the talent of others. Therefore, we may rightly believe that we are constantly being judged by our peers and wrongly assume that our hit rate in proving that we are right is what will determine other’s beliefs about our capabilities. I think it’s important to realize that the judgements about people’s intellect is much less about the percentage of time they are right and much more about the depth of thought displayed during an exchange. By shifting your focus away from trying to win the debate, you can leverage the expertise of others while still gaining the respect of your peers.



CIO:
 What are the biggest current trends you are seeing that have surprised you?​

Myhre: Although I don’t cover private equity, I’ve heard a number of stories of venture capital investments in companies creating meat alternatives. I have no idea if any of these companies will provide an attractive rate of return, but I’m incredibly excited about the potential positive benefits that would accompany such a shift in consumer preference. Widespread adoptions of clean meat would lower agricultural prices (leading to less world hunger), decrease carbon emissions (slowing global warming), and prevent the suffering of billions of sentient beings. Three things we should all be excited about.