Two Hats are Better Than One
David Villa has been chief investment officer of the State of Wisconsin Investment Board (SWIB) since 2006, but as of October has taken on an additional title, executive director.
In his dual role, he will continue to be in charge of managing approximately $107 billion for the SWIB, the ninth-largest retirement system in the US.
During his tenure, he has built up the pension system’s internal management—around half of the assets are internally managed—and also launched and built up programs like hedge funds.
CIO: The State of Wisconsin Investment Board has expanded its hedge fund program. Can you provide some details on the increased size?
Villa: At the end of 2011, the hedge fund portfolio was about $500 million. At the end of September 2018, it was about $6 billion. The target size will depend on fund capacity and the opportunity set.
CIO: What is the importance of the hedge fund program relative to the total portfolio? Is it considered a risk-mitigation strategy in case of an equity market downturn?
Villa: The hedge fund portfolio is considered a source of excess return over the policy portfolio. It is not a risk-mitigation strategy. Hedge funds do not have an allocation in the policy portfolio. They are treated as an overlay and are authorized or funded by the active risk target, which is approved by the trustees.
CIO: What innovation strategies did your pension plan implement in the last year?
Villa: The pension plan has not implemented new strategies in the last year, although we have implemented new instruments that allow SWIB to enhance its investment strategies. In the prior three years, the fund launched a multi-asset division that can invest across all asset classes and a private equity co-investment portfolio.
CIO: In an expected low-return environment, what strategies do you feel the pension plan needs to implement in the future?
Villa: SWIB has four strategies that are meant to contribute in a low-return environment:
- Total fund leverage of 10% allows the fund to extend the market return of the policy portfolio
- The hedge fund alpha overlay allows the fund to increase the active risk and active return expectations
- The launch of a multi-asset division allows the internally managed public market strategies to invest in between the cracks and increase the expected return from active risk
- The expansion of the exposure management overlay at the top of the house allows the fund to increase the return by amplifying the most attractive investment opportunities in an overlay structure.