Lyndsey Farris Principal Investment Officer,
Connecticut Pension Fund Management
Lyndsey Farris

“I’ve had the privilege of working very closely with Lyn for the past 18 months and find her to be an individual with incredible capabilities and potential. She possesses the strong work ethic, intellectual curiosity, analytical rigor, and management capabilities one looks for in a successful CIO. She accepts work assignments enthusiastically, collaborates with teammates easily, and executes responsibilities with confidence and professionalism. She is a force of nature within our investment team, always looking for opportunities to expand her knowledge in all areas of investing and drive better outcome for beneficiaries. I have complete confidence in her ability to eventually function and excel in the role of chief investment officer.”

Steven Meier, interim CIO, Connecticut Retirement Plans and Trust Fund

Lyndsey Farris’ hobbies are rock climbing and acro yoga (which involves acrobatics)—group activities that, in her words, “involve a good amount of risk.” She also stipulates that she is a stickler for safety. “I always check and double check the rigs, ropes, and equipment we use,” she said. Plus, Farris went on, she is in constant communication with her team members “because I don’t want anyone to be caught off guard.” 

That same spirit informs her investing behavior. As principal investment officer at Connecticut Pension Fund Management, Farris, CFA, CIPM, explained that “I am not afraid of risk, but I seek to fully understand it. And I will diversify away or hedge any risk that I’m not getting paid for.”

With a bachelor’s in actuarial science from the University of Connecticut, she landed her first job at Prime Advisors, which services insurers, foundations, trusts, and family offices. Here, she honed skills in quantitative analysis and asset allocation. Then she worked as an allocator at insurer Cigna. She joined the Connecticut pension fund in 2018, and was promoted to her present rank in January 2020.

She has a particular focus these days on fixed income. Her previous boss, Laurie Martin (who left earlier this year to become vice president of finance at Baystate Health), noted: “Her analytical skills are second to none and her ability to find emerging and niche managers and strategies have led to consistently strong returns over the long run.”

CIO: How would you deal with rising inflation and interest rates?

Farris: Moderate inflation and higher rates in a healthy economy are not a bad thing. Having some yield and term premium back in this market should take some pressure off LDI [liability-driven investment] investors, which have continuously had to reach down in credit quality and liquidity since the great financial crisis. While it can certainly result in some near-term pain in certain markets, investors should be able to weather this environment by being selective and thoughtful around their positioning. Although TIPS [Treasury inflation-protected securities] and Linkers are often viewed as the go-to assets to offset the impact of inflation, personally, I believe there are better inflation hedges that offer the potential for higher returns with less structural challenges.

In this market, I favor real assets, particularly infrastructure. If fiscal stimulus continues to come from Washington as predicted, this should create ample opportunity to invest in lucrative deals. Other real assets that act as inflation hedges (real estate, commodities, farmland, and timber) still have pockets of substantial opportunities as well, despite having risks and technicals impacted by COVID-19.

In other asset classes, I favor staying more active than years past. Quality of earnings matters in an inflationary environment. Companies with pricing power that can pass along rising costs will do better than companies that are price takers. Being strategically active in equities (depending largely on cap structure, style, and geography) can add alpha while protecting against inflation. Taking on active credit risk in this market (even with low yield and compressed spreads) can preserve principal while weathering an environment of rising interest rates when coupled with low default rate and long runway.

While the future of inflation is still largely unknown, expectations of higher rates can create opportunities across the investment landscape.

CIO: What is the best way to bring more diversity to the financial industry?

Farris: Diversity of thought is such an important piece of the investment puzzle. A strong, cohesive team with differing viewpoints can create the best understanding of risk and return. Contrarian viewpoints are integral; it helps in developing real conviction in your positions. Funds where people surround themselves with those who think like them tend to fall victim to misunderstanding value and underperform as a result. The best way to create diversity of thought is to create diversity of backgrounds.

Unfortunately, it’s human nature to gravitate toward people who remind you of yourself and you can relate to. When mentoring and promoting people, usually people choose those individuals that remind them of themselves, subconsciously creating the opportunities they wished they had in their career for those individuals. I have certainly been guilty of it in the past and it’s something I’ve actively had to work on counteracting. We already have someone on the team that thinks like me; consequently, I need to choose people who think completely differently and bring a unique perspective we otherwise wouldn’t have.

I am encouraged by the emerging recognition of the untapped potential in women and people of color in investing. These individuals may have been previously overlooked but could make a significant positive impact on the investing world if given the opportunity. And unless we change the way we think about recruiting, hiring, and promoting talent, we risk unconscious bias preventing this talent from advancing in our industry.

The best way to increase diversity in investments is from the top. We need more women and people of color in executive roles to help identify and lift out the best talent all throughout the industry. Concentrating diversity at the bottom rung of the talent pool means nothing if that diverse talent is not given the chance to excel due to the fact that no one above them can identify with them. We need real, measurable action from the C-suite working toward diversity goals starting at the top.

CIO: Is cryptocurrency a flash in the pan, or an asset of lasting value?

Farris: As crypto exists today, there are far too many political risks and speculative forces for me to get comfortable with it as a strategic investment. There is risk in whether sovereign powers will be willing to give up their control over their currency. There is risk in countries’ willingness to give up the power of their central banks to stimulate their economies when needed. I do not see a situation where countries willingly embrace any of the crypto coins that exist today as their new currency, nor do I see an acceptance of a crypto coin as the reserve currency over the USD.

That said, I think the infrastructure being developed around crypto is fascinating, progressive, and invaluable. And I think we will eventually see a move to digital currency, one likely backed by sovereigns.

It could be that we’ve seen so many countries turn a blind eye to competing currencies because they are looking to see how the infrastructure develops and how the digital currency works in practice. Once crypto has been stress-tested a few times and the infrastructure is set, I would imagine we will see a digital version of the US dollar, euro, and/or renminbi. And with the introduction of these sovereign-backed crypto coins, we will likely see current crypto coins disappear.

CIO: How will the pandemic have changed the economic/financial world?

Farris: The swiftness and broad nature of Fed action following the market meltdown in March 2020 seemed to take financial markets by surprise. The Fed not only propped up investment-grade markets with unprecedented liquidity, but it also announced its intent to support high-yield markets as well. While it helped capital markets stay liquid and afloat during the COVID-19 crisis, it did raise many questions about the Fed’s reach in the investment world and the market’s reliance on stimulus.

Is a liquidity crisis a thing of the past? If the Fed was willing to come in and support high-yield, would it consider coming in and supporting equity markets in a future crisis? And given that markets have been stimulus-addicted for the past decade and more, will the Fed ever be able to take a step back from markets again? Is its role as the liquidity provider cemented? How far are we from actual market valuations without the government intervention?

Reliance on the Fed to support and backstop asset prices may distort risk perceptions and drive unbalanced investor decisions in the coming years. Industry-wide, I believe the importance of technology will continue to grow. The flexibility technology allowed us during this crisis was critical in our ability to continue day-to-day activities without missing a beat. As catastrophic events have picked up in frequency, having this flexibility has become integral to operations on a go-forward basis.

CIO: How will ESG change investing going forward?

Farris: I believe ESG [environmental, social, and governance investing] will be a driver of returns going forward across all asset classes. I believe ESG is a powerful tool to measure risk that has been mispriced in this market. I think as our treatment and understanding of ESG will continue to grow and improve, that exploiting those mispricings will impact performance. Staying on top of ESG is paramount to our duty as fiduciaries.

The value in ESG analysis is long term in nature. Because the evolution has been ongoing and there has not been a good standardization of ESG disclosures, it has been treated as an art more than a science. Often, critics of ESG focus on the lack of alpha from funds using exclusionary screens, but ESG is far more nuanced than that. I believe it will be more impactful going forward.

As climate change continues to accelerate, we have also seen an acceleration of associated risks. Large, damaging storms and weather patterns have increased in frequency. Rising sea levels have impacted municipalities and real estate. Shifting weather patterns have impacted farmland, flooding, and water tables. Risks that are identified through ESG, including litigation and regulation, are becoming more prevalent and more important to investors. And as ESG evolves, these factors will likely start to show themselves more prevalently in valuations. Fiduciaries need to stay ahead of the curve.

CIO: What asset class or investment troubles you most right now—and why?

Farris: Being principal investment officer of fixed income, I’m relatively bearish on investment-grade fixed income in this market. The asset class is priced to perfection with low yields and low spreads. Quality in this market has changed since the global financial crisis; we’ve seen the asset class start to barbell itself in quality with a large amount of government-backed debt on one side and an increasing BBB-segment of the credit market on the other side. And we’ve seen duration continually drift higher. This creates a perfect storm of risk for a rising rate environment. With the amount of surprising economic numbers we’ll likely see during the reopening, inflation expectations will likely be volatile and, subsequently, we’ll see rate movement. We are looking to insulate our portfolios from rate volatility respective to our benchmarks.

CIO: What should be an investment trend, but isn’t (yet)?

Farris: I’m surprised we haven’t seen a strong demand for an equivalent of smart beta or enhanced indexing in fixed income yet. For example, every manager benchmarked to the Bloomberg Barclays US Aggregate underweights Treasurys as a core strategy. You don’t necessarily need to be paying active fees to have that trade in your portfolio. There are certainly areas of this market where fundamental analysis yields alpha over time (credit, structured produced, and non-agency mortgages come to mind), but there are plenty of highly efficient sectors where indexing would be appropriate. I would love to see more hybrid strategies offered.

CIO: What investing decision have you made that you’re most proud of?

Farris: I am most proud of those efforts that were made during the COVID-19 shutdown. I had taken on a new role in January 2020 and was immediately thrown into a financial crisis and health crisis the likes of which we had never seen before. Our strategy for weathering the shutdown was to not be afraid of risk (as long as we were adequately getting paid for it), increase flexibility of the portfolio, and widen our sources of uncorrelated beta for diversification. The result was a portfolio structure that was able to take advantage of market dislocations as we were able to identify them. And, consequently, performance was strong against our benchmarks during the fiscal year.

We did not move to cash after markets sold off in 2020. Instead, we identified that investment-grade income would recover first, followed by high-yield, and then equities. As we saw the expected recoveries occur, we allocated tactically across our asset classes, often using passive vehicles to be able to take advantage of the opportunities immediately while maintaining a liquid profile. We chose not to participate in the 2020 TALF [Term Asset-Backed Securities Loan Facility] program, correctly deducing that spreads tightened on the news and there was little performance opportunity compared to investment fees. Additionally, identifying a dislocation in convertible bonds and predicting continued volatility as we went through the election cycle and reopening, we made the decision to create an opportunistic convertibles sleeve in mid-2020. These decisions bolstered performance significantly.

Looking forward, I want to continue efforts to increase flexibility and uncorrelated beta sources. We are looking into high-yield structured credit as well as preferred stock, both asset classes that were out of favor following the great financial crisis but that have been time tested and proven through several types of markets. I believe maintaining flexibility without sacrificing yield and seeking to diversify uncorrelated beta will serve us well in the next cycle.

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