A Futurist CIO in Silicon Valley

William "Bill" Coaker

Chief Investment Officer
San Francisco Employees' Retirement System

A Futurist CIO in Silicon Valley

Beneath Bill Coaker’s unassuming nature is a prescient mystique.

When the COVID-19 pandemic spread across the globe, it brought a renewed significance to the health care and technology themes the CIO of the $30.7 billion City and County of San Francisco Employees’ Retirement System (SFERS) was already working on. He propelled his private equity and active public equity strategies to 23% and 33% returns, respectively, in calendar year 2020.

“SFERS emphasizes investing in technology, software, the digital transformation, cloud computing, biotech, fintech, artificial intelligence [AI], the USA, and China,” Coaker told CIO—all themes that are coming to bear fruit and that have been accelerated by the pandemic. After COVID-19 crippled the service industry and swept its workers into unemployment, Coaker’s technology and biotech investments found themselves catapulted upward and flung to the top rungs of the K-shape, in the bifurcated K-shaped recovery.

In addition to the obvious—China’s post-pandemic growth story, and cloud and software technologies that do well when companies suddenly find themselves creating armies of remote workforces—biotech and gene manipulation also had an extraordinary year as they advanced technologies such as “genetic scissors” to cut out and replace unwanted genetic code. The 2020 Nobel Prize in Chemistry knighted Emmanuelle Charpentier and Jennifer A. Doudna, who discovered CRISPR/Cas9, dubbed the “genetic scissors.” Such gene manipulation was even used in some COVID-19 vaccine research. And although Coaker cannot name specific investments, word on the street is that he has been able to articulate the intricacies of gene manipulation for at least five years. In effect, he may have been one of the first CIOs to see its potential. That ability has set him apart.

Last year, his active public equity strategy returned more than 33%.“Our technology, biotech, and China investments accounted for the vast majority of our excess returns in public equity in 2020. We’ve also experienced significant success in our private equity bookmaking investments in technology, biotech, and China,” he said.

Coaker has been a long proponent of investing in businesses, not allocations. His northern Silicon Valley location allows him to keep up with the pulse of technology, but his investments range around the globe, as he seeks to invest where the leaders of the world will be.

“I think we’re in the midst of a historic transformation, from the Industrial Age to an era of science, technology, and innovation, and that the speed, scale, and impact of innovation is being significantly underestimated,” he said.

Next, the futurist is looking to AI, describing it as “the new oil” that will “transform every industry.” He believes artificial intelligence is to 2021 what the internet was in 2000 and social media was in 2010, and he sees it as a shift as impactful on the human experience as the change from the agriculture era to the Industrial Age. He imagines every aspect of the economy, including agriculture, education, energy, entertainment, finance, health care, industrials, sports, and transportation, will be transformed.

The results of his vision have been encouraging. Returns over the past five years rank SFERS in about the top 5% versus peers, even as the volatility of returns rank in the lowest 10%, and risk adjusted returns rank in the top 1% to 2%. Three- and five-year returns are 10.1% and 10.9%, respectively. (Coaker joined SFERS from the University of California in 2014.)

He says the team approach is integral to SFERS’s success. “The underpinnings of our results have been our strategy, manager selection, building a talented team who are very good at what they do, and substantial support for our differentiated approach from our executive director and our retirement board,” Coaker said.

On Choosing Niche and Mission

When seeking managers, SFERS doesn’t have many investments with large, generalist firms. It seeks to invest in niche strategies and people with specialist skills in all the main areas Coaker focuses on, as well as communications infrastructure, health care royalties, the energy transformation, and real estate investments with tailwinds such as residential apartments in the South and Southeast.  

“We’re seeking managers with unique strategies, specialist skills, significant and sustainable comparative advantages, high alignment of interests, an extraordinary passion and dedication for investing, and who possess a command of the facts, keen insights, and superior judgement, and who are outstanding at what they do. We’re also seeking managers who are our business partners, who join together with us to achieve our mission,” Coaker said.

He encourages organizations to pursue a strategy with the objective of achieving high long-term returns, noting: “Most stakeholders underestimate the wealth created by earning high returns over a long periods of time.”

Achieving high returns enables an organization to better advance its work. Coaker explained: Suppose three organizations have assets of $1 billion and all three spend 4% annually at the end of each year, for 20 years. Suppose the only difference is that organization A earns 7% annualized, B posts returns of 10% per year, and C earns 12% annualized. At the end of 20 years, organization A would have assets of $1.8 billion, B would have $3.2 billion, and C would have $4.6 billion. It also means that in year 20, organization A spent about $70 million on its mission, B spent nearly $130 million, and C spent more than $180 million.

“Organizations that post high long-term returns generate much more resources, which enables them to spend much more on their mission. In sum, it is worthwhile for organizations with a long time horizon to pursue a philosophy and approach toward investing to achieve high long-term returns,” he concluded.

Making a Public Equity Case for Alpha

Coaker believes public equity is a great space to generate high amounts of alpha, despite many of his colleagues investing passively in public equity. 

In 2020, Coaker said his active public equity book soared 33%, which was roughly double what his benchmark, the MSCI All World Index, returned. His book emphasizes investing in leaders in innovation in how business will be done in the future.

He points to examples of how much excess return can be achieved in public equity by investing in great businesses and in leaders in innovation. He mentions that Amazon went public in 1997 at a valuation of $450 million and is now valued at $1.65 trillion.  

“That’s a 3,667x return in 23 years. The S&P 500 has returned about 6x during the same period. An investment of $1 million 23 years ago would be worth about $6 million were it invested in the S&P 500 while it would be worth nearly $3.7 billion were it invested in Amazon,” he said.   

Then, of course, there’s Apple. He notes that an investment in Apple in 2007—when it was a mature company but had just introduced a new innovation, the smartphone—of $1 million is worth $67 million today. An investment of $1 million in the S&P 500 in 2007 is worth about $3.5 million today.

Similarly, Nvidia, which designs graphics processing units for the gaming and professional markets and chips for automobiles and mobile computing, has posted returns of 38% annualized for 10 years. A $1 million investment in Nvidia on February 1, 2011, is worth more than $25 million today. Then there’s Shopify, which went public on May 20, 2015. Its annualized return as a public company has been 109%. An investment in Shopify of $1 million at its initial public offering (IPO) would be worth $67 million today, a 67x return in less than six years as a public company, Coaker noted. He said significant excess returns are achievable in public equity when the emphasis is on investing in leaders in innovation. 

He cites Yale University, which, per its annual report, has posted more than 14% annualized returns in public equity for the 20-year period that ended June 30, as another example of excelling at excess returns. The MSCI ACWI returned about 6% annualized over the same time period. A $1 million investment earning 14% the past 20 years would be worth $13.7 million. Comparatively, $1 million earning 6% over the past 20 years would be worth $3.2 million. 

Coaker’s advice to others is to drown out “the noise,” focus on objectives, then design a strategy and philosophy on investing that meets your objectives. Hire a talented team, and foster a culture that retains them through continuous learning and development, performance appraisals, 360s, in-depth strategy reviews, hosting conferences, meeting regularly with colleagues, teaching, and mentoring. Establish goals, including returns, risk-adjusted returns, and qualitative goals, and measure, monitor, and report on progress toward your goals. Finally, devote significant amounts of time for board, staff, management, and stakeholder engagement. 

“Dedicating extensive amounts of time and energy toward stakeholder engagement will enhance trust, confidence, and inclusiveness, and will likely reap significant long-term benefits,” Coaker said.

Christine Giordano

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