Walter Kress’ Prescient COVID-19 Moves Paid Off

The EY CIO emphasizes the importance of analyzing both underperforming and outperforming strategies.

When the markets were at their most unpredictable during the COVID-19 crisis, Walter Kress, CIO of EY US, saw through the storm and steered the firm to make two opportunistic moves.

His strategy included timely large-scale rebalancing from long-term US Treasuries in early March, then feathering in the realized appreciation into equities during the latter part of the month. This authoritative rebalancing was followed by new investments in fallen angels at the beginning of the second quarter, when credit spreads were elevated.

As he directs his four-member team, his day-to-day responsibilities at EY demand acuity. And, as the head of investments at a public accounting firm, he faces many challenges and limitations in selecting managers and strategies because EY is subject to US Securities and Exchange Commission (SEC) and American Institute of Certified Public Accountants (AICPA) independence requirements. This means the firm cannot invest with its audit clients which include fund managers. And if fund managers aren’t audited by EY, but have ownership in companies that are, they’re also off limits.

Kress has pioneered several initiatives to help EY. For example, he established a watch list approach, which increases the focus not only on strategies which may have underperformed their benchmarks, but, importantly, on those which significantly outperform to help ensure that the committee understands the drivers of excess returns in detail to help detect unusual risk positioning by those asset managers.

Lucky for EY, he understands both sides of the industry from personal experience. Prior to joining EY in 2016, he honed his buy-side investment skills for almost a decade as a managing director and chief operating officer (COO) for JPMorgan Chase’s own retirement plans, where he also oversaw the company’s multibillion-dollar alternatives portfolio for the last three years of his tenure there. Before joining the allocation side of the business, Kress’s sell-side experience included roles as senior vice president of Mellon Institutional Asset Management, president of Mellon Advisors and national sales manager for Dreyfus.  

Having spent roughly half of his career on the sell side, he has overseen or been deeply involved with strategic planning, manufacturing, distribution, governance, and compliance of large asset managers covering not only institutional, but also high-net-worth and retail channels. 

As the former COO of more than $25 billion of qualified assets at JPMorgan, a highly regulated bank, he spent considerable time working on complex structures and negotiating legal documents.

Kress’s advice to other CIOs for successful negotiations is to “carefully consider any request for adjustments to structures and fees outside of the standard offering through the lens of the investment manager [IM] and show that they have considered the impact of any ask from the perspective of the IM as a partner.”

Fortunate to have strong relationships among his committee, the investment team works with an eye toward transparency and leveraging the diverse backgrounds and viewpoints of its members. 

“By design, each represents a different specialty within the US partnership, and senior members of our investment team regularly seek feedback and socialize our thoughts and priorities related to each one’s expertise,” Kress said.

Kress believes it is imperative and equally important to understand the contributors to stronger performing and lagging investments. Last year, the firm spent as much time analyzing why active large cap growth equities, including domestic, international, and global, performed particularly well. The firm monitored them closely to ensure that there were not undue risks being taken, both on an individual strategy level and at an asset class basis, he noted. 

Although company policy prevents him from publicizing returns, among insiders, Kress is known for his market savvy returns and excellent track record of success.

Since the portfolio lacks illiquid investments, he says his diverse investment team challenges each other through discussions, and has a “sharper tool which we use as volatile markets create imbalances in the shorter term returns of different asset classes.”

The team can quickly rebalance to stay at or near policy targets and drive excess returns. 

“Shorter term, we think about impact of new administration initiatives, including potentially higher taxes, along with the associated impact on the recovery from COVID-19 and corporate earnings. Longer term, I think about scenarios where proposed fiscal spending alongside easy monetary policy induce more inflation and how the Federal Reserve will change their posture,” Kress said.

Kress is currently pondering the future of the dollar and public pensions. “First, the impact of the higher twin deficits and their impact on the value of the US dollar. Longer-term and given their massive scale, the challenges for many significant state pensions sustaining their benefit offerings and the impact of any solution on the capital markets. Also, I do spend a fair amount of effort focusing on where not to spend time and energy.”

—Christine Giordano