When CIO visited MoDOT & Patrol Employees’ Retirement System (MPERS) last year, investment chief Larry Krummen told me the tale of how the sleepy old pension with no investment staff in Jefferson City, Missouri became a $2 billion fund in 12 years.

“When I first joined MPERS in 2003 as the first-ever CIO, about half of the pension fund account was in United Missouri Bank [now UMB Financial Corporation],” he recalls again on a more recent phone call. “We’ve basically transitioned the entire portfolio since then, except for the old timber management.”

In the first three months of his arrival, he laid out an “aggressive plan” to the board—one that would “bring the pension fund into the 20th century, not to mention the 21st century,” Krummen continues. “Our longer-term goal was to build out an alternatives allocation, specifically in private equity, so we’re not just relying on the stock market to drive performance.”

Thanks to a supportive and optimistic board, Krummen was able to sit down with consultant Summit Strategies to draft not only the investment policy, but also a governance model that allows staff to move freely as markets go in and out of favor. “The board should be focusing on risk and asset allocation,” he adds. “The implementation should be delegated down to the staff and the consultants.”

Over the next few years, MPERS moved from a consultant-driven model to one that invested more and more internally as Krummen filled out his team. While the portfolio became increasingly sophisticated under the CIO’s tenure–it now stops just short of the risk parity approach its neighboring fund the Missouri State Employees’ Retirement System is doing–Krummen and his team have managed to stay true to key investment beliefs from MPERS’ early days.

“We’ve always preached diversification is critical because the future is unknown,” he explains. “Throughout our history, we tried to take diversification as far as we can short of a full-blown risk parity implementation—anything we can do to minimize the equity market risk in the portfolio.” Plus, Krummen says he always goes back to the board on prudent asset management and starts with a focus and understanding of risk. These qualities have allowed flexibility in investment policy, he continues, that permits the portfolio to be nimble—to “pick up these little single wins.”

Snapping up these single-digit gains consistently has been MPERS’ strategy of late—a way to find returns in a low-returning environment. For example, one recent big initiative was in collateralized loan obligation (CLO) debts, Krummen explains. With the help of consultant NEPC, MPERS found value in not only AAA CLOs, but in lower tranches as well, leading the fund to hire a dedicated CLO manager for a separate account.

MPERS also decided to restructure its outstanding timber investments—“we essentially gutted our policies around timber and natural resources,” Krummen says—to target private and more local landowners. This revamp opened up doors and resulted in significant deal flows, he adds.

“We don’t have false optimism that this sort of investment would get 20% a year,” Krummen says. “But looking at markets a little differently and hitting singles and doubles over the benchmark… it’s acknowledging the low-returning environment and being creative about it.”

—Sage Um