“Jason is one of SWIB’s secret weapons (though less secret after this nomination). His keen understanding of managers, investment strategies, and competitive sets enables him to effectively and creatively collaborate with partners, both inside SWIB and across the investment community. With a wide range of competencies from quantitative to reinsurance to fundamental equities, Jason develops relationships that work for our partners and deliver returns for SWIB’s pension participants. He is a key contributor to the SWIB edge.”
—Anne-Marie Fink, private markets and funds alpha CIO, State of Wisconsin Investment Board
As an undergrad at Marquette University, Jason Rector got accepted into the Applied Investment Management (AIM) program to help manage the university’s endowment. After a first job as a financial analyst at the Brady Corporation, he went on to Mesirow Financial, where he did hedge fund due diligence work. “It was eye-opening,” he said. Eric Siegel, head of operational due diligence there, taught him the importance of intellectual curiosity and “not to be afraid to ask any question.” Rector rounded out his financial education at the University of Chicago’s Booth School of Business, where he earned a Master of Business Administration.
Rector, who also has a CFA designation, went to the State of Wisconsin Investment Board (SWIB) in 2015, where he has risen to managing analyst. “This is a good fit,” he said of SWIB, adding that he finds the work “rewarding and challenging.” He deals with external managers for hedge funds, long-only fixed-income, and long-only equity, among others.
CIO: What is the best way to bring more diversity to the financial industry?
Rector: Research shows that there are many benefits to diversity that are crucial to the investment industry, including better decisionmaking and increased returns. Yet we continue to see a fairly homogeneous group of individuals within the investment industry. I personally feel that the necessary progression to make a meaningful change is to start with awareness, move to understanding, then make a commitment to change. The lack of diversity may be the result of unconscious bias, but it takes continuous conscious intervention to overcome. Recent work by Dan Ariely and others has begun to focus investor attention on how diversity, equity, and inclusion require authentic commitment to change instead of a simple check-the-box exercise.
CIO: What are your favorite alts, and why?
Rector: My philosophy for evaluating alternative investments is to look for situations where there is incremental compensation in return relative to similar risk profiles in liquid markets. Also, given the wider breadth of most alternative strategies, I expect a higher risk-adjusted return.
One area that tends to show this premium return for a unit of risk is uncorrelated, niche, or specialist strategies. Within the hedge fund portfolio, we are attracted to opportunities that are complex enough to require specific expertise, which can either dissuade a generalist investor from participating or provide variant perception for our specialist to extract.
Accessing the opportunity through a hedge fund provides SWIB with immediate exposure to someone with a career of experience in the space, and the manager has a flexible mandate to construct the trade in the most efficient manner. These strategies could be as simple as country or industry experts but also include more nuanced opportunities such as specific types of litigation, events, or opportunistic arbitrage trades that arise.
An up-and-coming area in recent years has been alternative credit. Most leveraged loan and direct lending strategies focus on corporate credit risk and have traditional bullet loan structures. There has been an opportunity to extract extra premium from markets by exchanging liquidity for customization and control over collateral. Asset-based lending has generated attractive returns over time with minimal losses due to the customized structure providing control over collateral.
In many situations, this collateral is cash flowing, which helps de-risk the transaction over time vs. a traditional bullet loan, which arguably increases in risk over time. These strategies have struggled to find a home in large institutional portfolios because the duration is shorter, and structure is different than traditional private credit strategies. This setup creates the interesting opportunity to be a liquidity provider and extract extra compensation for a given unit of risk.
CIO: Is cryptocurrency a flash in the pan, or an asset of lasting value?
Rector: I believe there are enough practical applications for cryptocurrency to keep it around for good, but, in the near future, volatility will remain high and the makeup of the asset class will evolve until central banks and governments provide credibility of some sort. I don’t claim to have expertise in assessing which technologies or specific currencies will win out. I do expect the end result to be a middle ground between the traditional currency system and the purest or most aggressive expression of cryptocurrency being sold by the venture community today.
CIO: How will the pandemic have changed the economic/financial world?
Rector: The obvious and immediate implications to the day-to-day lives of investment professionals will be the impact on business travel and the format in which meetings are conducted. I do expect business travel to bounce back; however, I expect it to evolve and be more efficient than pre-pandemic.
In-person meetings will be more tailored to cover topics that are difficult to do virtually. I expect to do significantly fewer intro meetings in person; however, I do expect to spend the incremental time on the road digging deeper with managers, reviewing systems and procedures which are more difficult to do via videoconference. I also expect to work a lot more from the airport and in between meetings given the tools and virtual skills developed over the past year.
At a higher level, one of the most important lasting implications of the pandemic to financial markets will be how central bank and government policy evolves. 2008 was a step change in the tool kit and level of involvement in financial markets for regulators. 2020 took yet another step toward more a more integrated reality between financial markets and regulators.
Moving forward, does that trend continue or do regulators take a step back? I find it hard to envision a scenario where regulators can remove their influence and expected reaction function from security prices. I do not believe in making an investment reliant on any one reaction or decision by a regulator. However, moving forward, if you’re not factoring in what the base case and potential range of reactions are, you are missing a material portion of the picture.
CIO: Where do you see the most exciting areas to specialize further over the coming years?
Rector: Asia is an area that our team has been increasing its time and resources to evaluate, and I expect that to continue for years to come. It is a region that requires specialization to underwrite risk and see opportunity. Different countries, cultures, and stages of economic development create the need to specialize even within the region.
There is always an evolution occurring in credit markets. The alternative credit markets have gained more popularity in recent years through technological innovation, mainly focused on consumer or small business lending. There are some select pockets of asset-based lending that have the combination of scale to deploy significant capital along with complexity, requiring expertise that dissuades a corporate credit generalist from entering the space. Like direct lending in the mid-2000s, the current set of alternative credit strategies do not fit nicely within current investment team structures. Moving forward, we expect to continue to deploy resources to build out expertise to analyze and extract excess returns from these opportunities.
CIO: What asset class or investment troubles you most right now—and why?
Rector: Liquid corporate credit is the area that gives me the most concern because the distribution of outcomes appears negatively convex. Credit spreads and absolute yields at low levels limit upside and absolute return potential, while the downside of a return to historical levels or any sort of default cycle could be meaningful. Markets may be pricing in an expected central bank or government response to issues in credit markets; but a thesis reliant on a specific policy response just to get to “fair” value seems less than ideal. Further, the ex-ante correlation between credit and other assets classes may be volatile over time, creating some portfolio construction concerns.
CIO: What should be an investment trend, but isn’t (yet)?
Rector: Two trends come to mind that would be interesting to see gain more momentum. First, I expect to see a pickup in the development of more sophisticated methodologies of benchmarking and indexing, particularly within equities. Market cap weighting benchmarks is overly simple and has led to a decrease in diversification of certain popular equity indexes.
The top 10 stocks make up 29.5% and 18.3% of the S&P 500 and MSCI World indexes, respectively. Indexing is usually thought of as a way of diversifying risk across different companies or factors, but that may or may not be the case with market cap index methods. Investors should answer what their objective and preferred risk profiles are for topics such as diversification, factor risk preference, or overall volatility level. Based on that assessment, there are many tools available today to construct a portfolio that aligns the risk with the objective better than picking the most standard or common existing indexes.
The other trend that is more niche but would be interesting to see it play out is a structure or marketplace that provides liquidity for illiquid assets. Companies are beginning to bring more liquidity and reduce transaction costs to homeowners for residential real estate but extending that idea further to make commercial and residential real estate more like current equity markets at the individual asset level would be interesting. Being able to list your house on an exchange could become an alternative form of financing a home purchase, for example.
CIO: What investing decision have you made that you’re most proud of?
Rector: It may be recency bias at play, but I’m proud of how our hedge fund team reacted to the environment of the past 15 months. We try not to get caught up in any one investment, but rather focus on the process that goes into making the investment. Considerable effort was focused on putting a process in place that was durable through different market environments and allowed the team to use our competitive advantages to our benefit. Throughout 2020, the entire team was focused and flexible to adapt to rapidly changing dynamics. We relied on our process, did what we said we’d do in a volatile period, and, thankfully, we were profitable and helpful to the broader firm during the year. To have 2020 play out the way it did and for our team to execute and deliver for our constituents was incredibly satisfying.
CIO: Who is the manager you don’t currently work with whose brain you’d most like to pick for an hour?
Rector: I’m currently spending more of my personal research time reading about what makes a top-tier investment process and how it can endure. I’d appreciate an hour with Dan Ariely [of Duke University] or [Nobel Prize winner] Daniel Kahneman, as they’ve both done a lot of innovative work on decisionmaking and how to structure a team and process to operate efficiently.
