After a year of challenges, and with an investment office about to undergo a generational shift, Ashbel “Ash” Williams, one of the most respected chief investment officers in the industry, is planning to retire in September.
Williams has headed the $250 billion Florida State Board of Administration (SBA) since October 2008. The SBA manages more than 25 mandates, including the Florida Retirement System Pension Plan. Williams had returned to Florida during one of the most critical times in the state’s financial history, when the fund had plummeted as a result of the great financial crisis.
He said his reasons for retiring are based on the requirements of the state’s retirement system program, and not anything else.
Williams, 66, told CIO, “It’s not because I have any desire not to work or that there’s any issue. The State Board of Administration is an outstanding place to work.”
And although he’s about to collect his retirement from the state fund he has worked for decades to fund, he is leaving himself open to future opportunities. Yet he adds that he’s postponing conversations with financial firms that could create conflicts of interest with his current day job.
Williams, whose returns for the state pension fund last fiscal year were approximately $39 billion, or 28.74%, has averaged 10.33% returns since he rejoined the fund. He is planning for his last day to be September 30.
Perfect Skill Set
It might be difficult for the Florida fund to replace Williams. As a state CIO, Williams has the rare amphibious quality of being able to slide fluidly between the two worlds of government and high finance.
He cut his teeth in Florida government before moving to the private sector and eventually returning to Florida government. Williams worked in senior management positions in Florida’s executive and legislative branches for 17 years before heading into the private sector for 12 years, working as president and CEO of New York-based Schroders Investment Management, and subsequently as a managing director at Fir Tree Partners, also located in New York.
By the time the native son returned to Florida in 2008, he was a rare and unusual fit to become the state’s chief investor. He could often be seen explaining the intricacies of investments to legislators (he reports directly to Florida’s governor and cabinet members) and then raising questions on complex investment initiatives within industry crowds, especially as the former chair of the Council of Institutional Investors. “Out of all of us, Ash and Chris Ailman [CIO at the California State Teachers’ Retirement System] are the most eloquent,” another chief state investor told CIO.
Transformational and Historical Influence
It’s too early to know what the ramifications of Williams’ retirement may be. He told CIO he has spent years training, nurturing, and empowering his staff.
Yet Williams has had a profound and historical influence on the way the Florida SBA invests. His early tenure as a legislative staff member for the Florida House of Representatives was during the 1970s, when the pension fund was not allowed to own stocks—just government bonds and corporate investment-grade bonds. When inflation hiked to 17%, it was Williams who suggested adding equities into the mix.
After his 12-year departure, he returned to Florida when the Great Recession crashed markets, and he shepherded the fund to health, building a fortress of stabilizing diversifiers into the fund while prepping it for growth.
Florida’s local government investment pool, which is also operated by the SBA, saw a classic “run on the bank” when participants were made aware that a small percentage of its asset-backed investments were downgraded. Outflows approached $14 billion, cutting the fund’s balance in half before the trustees froze the account.
During that time, in March 2009, the Florida Retirement System Pension Plan’s assets had followed the plunge of the Great Recession, withering to $83.7 billion from a previous high of $141 billion.
Asset allocators often fear rebalancing during huge market dislocations. The market seems convulsive, and the fear of career risk associated with plunging good money into what could be a bottomless cratering market can create terror and paralysis. In line with that, the Florida Retirement System Trust Fund suspended rebalancing for about a year. The former executive director had left under a cloud of scandal, and the acting executive director at the time, former Marine Lt. Gen. Bob Milligan, who was involved with recruiting Williams back to the fund, told him, “We have not rebalanced for a year” because of the unsettled market. The decision was being left to the next CIO.
At the time, the world was debating whether capitalism was dead.
Williams stepped in, making a judgment call that the world was a lot closer to the bottom of the crisis than commonly thought, betting that a full policy weight in global equity would be rewarded as investments rebounded.
“That did require an investment belief that the markets would come back,” he said. He recalled framing the situation to the trustees at the time, saying, “This is scary situation around the world without a doubt. We are standing at the edge of the financial abyss. And the question is, are we going to go into it or not?”
He then offered his opinion. “My judgment is, we’re in the USA: the best market economy in the world, the richest economy in the world. The market with the best rule of law. The best governance of a nation, as messy as it may be, and the most transparent capital markets on the planet. If anybody is going to get through this, we are. Yes, there will be economic pain, but there will be things that change for the good.”
He rebalanced. Then he found diversifiers to global equity risk. The legislature broadened his authority for alternative investments from 10% to 20%.
The investment team increased private equity and venture capital allocations, using them as stabilizers to aggregate returns during volatility and market price swings. They added diversifiers such as credit strategies, mining, commodity trading advisers (CTAs), infrastructure, royalties, real asset ownership, and leasing (planes, trains, and ships).
Adding to the Surly Situation
The Florida Hurricane Catastrophe Fund (FHCF), also administered by the SBA, was still recovering from eight hurricanes hitting Florida’s shores in 2004 and 2005, which fully used up the resources of the fund.
Williams had taken the helm, arguably, during one of the worst years in the board’s history.
He stepped in, cleaned up oversight issues, rebuilt the investment team, and turned the SBA into a powerful investor with a reputation for reliability, global investing, and making timely decisions.
“I came here to solve a problem and make improvements. We solved the problem and continued to make improvements, and then I thought we’re all having such a good time I said, ‘Why interrupt this now?’” chuckled Williams.
The Thesis Was to Find the Unloved
“Anything that is deeply unloved or even hated by investors, that is not attracting capital and has seen substantial capital outflow over a contiguous period over time, is usually worth a look,” he said. “At a time when investors are looking for something shiny, tarnished opportunities are often undervalued. And you can look around and find those and do something with them. Because you’re buying them on the cheap.”
Venture capital (VC) was a tarnished category about a decade ago because the dot-com collapse had destroyed so much value in the tech and small-cap space that frustrated investors quit allocating money to it. But Williams’ team scoured it, overweighting venture, and reaping rewards from initial public offerings (IPOs) from then on (including, most recently, $500 million from CoinBase).
It was tricky business, because general partners (GPs) at venture funds are typically secretive about their niche investment opportunities in order to remain competitive, and public funds are often trying to squeeze them to provide transparency. The key was finding intermediaries who added value, could help pick the right firms for the Florida fund, and could find smart companies that needed capital. Florida seeded, watched, and seeded again, building relationships based on mutual trust and good alignment.
“In any kind of relationship, it’s all about the alignment and shared goals. If you have those two things, and the character of the parties is good; it should do well, with everyone sharing the market risk,” Williams reflected. “What often impairs a number of investments, especially in the private market, is misalignment that’s not understood. When people allocate into things where someone else can do nicely while they do poorly, I think there’s a greater chance that they do poorly.”
The big drivers to the pension fund have been global equity, and private equity and venture.
Accomplishments Since ’08
- The local government investment pool, now rebranded as Florida PRIME, is back on solid footing, having returned participants’ principle and earned interest from when the pool was frozen. Assets have grown from $4 billion to nearly $20 billion.
- The pension fund has gained $166.7 billion since Williams’ return.
- The pension fund’s returns have averaged 10.33% since his return in 2008, versus a benchmark of 9.43%, or 90 basis points (bps) of outperformance during Williams’ most recent tenure.
- The FRS Investment Plan, a typical defined contribution (DC)-style plan, grew from 118,383 participations to 263,786 participants and from $3.7 billion to $14.9 billion under management since Williams’ return in 2008.
- The Florida Hurricane Catastrophe Fund now has $12.6 billion in cash on hand.
- The State Board of Administration Finance Corporation, the pre-event financing arm for the FHCF, has ample debt issuance capacity to meet the FHCF’s statutory capacity.
- And Williams restored the SBA’s reputation for reliability.
In Defense of Defined Benefits
It would seem, by many measures, that the retirement plan and state funds administered by the SBA are a success story.
Yet, over this past year, the defined benefit (DB) plan was up for debate.
On March 9, Williams took the podium in front of Florida’s governor and cabinet, in his typical dark suit, horn-rimmed glasses, and bow tie. As per his southern style, he began with a self-deprecating remark about his timeliness and some playful banter. Then told the cabinet that the fund was already up 18.2% in the fiscal year to date.
In taking the stand before the Florida cabinet, Williams was supporting DB pension plans across the industry. States tend to watch Florida, a state with one of the healthiest and largest DB plans (at 82% funded), as they seek to offload risk and liability. Williams, who has more than doubled the size of the pension fund, is known to be one of the sharpest CIOs in the industry.
He knew the DB plan, and the chance for a state pension in retirement, often lures people to Florida’s public service professions, such as teaching, in an otherwise typically low-paying state. And the state is constantly facing a shortage of teachers. (Florida teachers are paid, on average, $48,000, compared with $86,0000 in New York, or the national average of national average for a K-12 teacher salary of $64,524, according to World Population Review. Florida ranks 49th in the nation in teacher salaries.)
Yet despite the pension fund having a banner year, it was under consideration of being eliminated for every newly hired professional who wasn’t a first responder.
Florida Gov. Ron DeSantis asked Williams, “I know there’s a movement in the legislature to look at changes to the pension system. So how do you evaluate those, if you can offer us any insight?”
In fact, the legislature had been debating the changes to the state’s pension for months in a vacuum, during a time when members of the public were allowed into committee rooms only by invitation due to COVID-19 restrictions. This was William’s first appearance on the issue—defending one of the things he had made his life mission.
This year, legislators argued that the unfunded liability payments were diverting much-needed money from other programs. Williams said he recognized the unfunded actuarial liability (UAL) was large, at $36 billion, but reminded the cabinet that the UAL was a 30-year commitment, and not something that would go away if they abolished the pension plan for newcomers.
To combat the notion that the pension was unsustainable, he argued that the “statement overlooked the reality of history.” When the Florida Retirement System Pension Plan was created in the 1970s, it had a funding ratio of about 40%. “That’s terrible by any measure,” he said. But through reasonable benefits, responsible funding, and prudent investing, that funded ratio climbed to 119% in the 1990s. The state then dialed back employer contributions and dropped the funding ratio down to 108% in 2007.
After the great financial crisis, when asset values dropped like a rock, the funding level dropped into the high 80th percentile. Faced with the immediate emergencies of the recession, when the state was also dealing with a citrus freeze and a construction and tourism slowdown, the legislature was unable to make full actuarial contributions on the unfunded liability portion of the employer’s contribution, and it used the money elsewhere. From 2011 onward, employees began paying in 3% while employers’ contributions were reduced, and vesting increased from six years to eight years. Cost of living adjustments (COLAs) were eliminated for benefits earned after 2011.
An article in the Miami Herald by Charles Millard, former director of the US Pension Benefit Guaranty Corporation (PBGC) emphasized that, in actuality, Florida’s plan is performing well, and the envy of other states, at 82% funded, 10 percentage points above the median. The only problem with the plan, wrote Millard, is that the state has underfunded it by $1 billion per year for the past five years.
Years ago, the actuarial investment return assumption was significantly higher, at 9%. During Williams’ time, the return assumption had been as high as 7.75%. It was not until 2014 that the state started to reduce the assumption rate used.
For the past nine years, the SBA has argued for lowering the assumed rate of return used for the Florida Retirement System. Currently, the legislature has brought the assumed rate down to 7%, yet Aon investment consultants have advised Florida that a return rate of 6.6% would be far more realistic. At the time of this interview, Williams was writing a letter to the legislative leadership to address the issue.
The state has a high credit rating, and Moody’s Investors Service ranked Florida 48th in pension liabilities per capita and 48th in pension liabilities as a percentage of state gross domestic product (GDP). Now that the actuarial assumptions are almost within a reasonable range, Williams says he believes the plan would continue to work as long as reasonable benefits, responsible funding, and prudent investments continue to be in place.
During his appearance, Williams commended the Florida legislature for its fiscal prudence and for being attuned to the needs of private enterprise to keep the state affordable and encouraging free enterprise.
The Florida House of Representatives decided not to take up the issue during the 2021 legislative year and it died this year, although it could be resurrected next year.
A Generational Change at the Investment Office
After a tumultuous year, Williams isn’t the only one headed to retirement.
Out of his investment office staff, 33% of SBA employees are eligible to retire over the next five years. Nearly 60% of this group is supervisory/management level staff. He mentioned strong succession plans within the fund’s 2019/2020 annual report, quoting Warren Buffet’s “Someone is sitting in the shade today because someone planted a tree a long time ago.” (For a fiscal year riddled with coronavirus turbulence, ending June 30, 2020, total fund returns were 3.08%, 10 basis points above the benchmark.)
Williams wrote: “Currently, 18.5% of the SBA workforce has established a date within the next few years by which they intend to retire or will be eligible to retire by December 31, 2021. This equates to 40 full-time employees, 22 of which are in management positions, representing roughly 25% of SBA managers. While we will lose many of those people in the next 12 to 18 months, it is not cause for concern. Succession is an issue we have been keenly aware of and managing over the nearly 12 years I have been back at the SBA. During this time, all senior investment officers and almost all of top management have turned over. We have added and grown talent at all levels of the organization and developed succession plans in all our business units.”
He noted the Florida SBA has increased recruiting capability with the addition of a dedicated staff person in human resources (HR).
After retiring, Williams said he’ll make himself available to the fund as “a private citizen and a beneficiary, if they need me.” But he’s confident in the investment office’s abilities. “We have got a terrific team. It’s not just me.”
Williams is suggesting the future CIO of the fund be selected from within as an internal promotion. In fact, when asked of his greatest accomplishments during his tenure, he points to hiring, growing, and advising the team, and putting people in positions to lead and contribute.
“It’s all about making sure people understand that the paths to leadership, opportunity, and personal growth are many, and it’s all about your willingness to use whatever talent you have to your greatest ability. We’ll support your training, education, your participation in industry events, development of policy. We want leadership. We want this institution in aggregate to be a thought leader. And institutions get to be thought leaders by their people being thought leaders on a personal level. Everyone takes responsibility; we all step up together and we all advance together and it benefits us all.”
The budget has been up to trustees, with a goal to deliver high results at low cost. Williams has consistently increased the amount of money managed internally over the time he’s been back. In order to do it prudently, he needed the talent, risk controls, systems, information technology (IT) security, and accounting competence to manage complex investments. Starting with then-Gov. Rick Scott, the investment team has made its case with its return-on-investment (ROI) results for each budget request.
The fund has added an annualized 87 bps in value-added returns from November 1, 2008, to June 30, 2021. “That is not an accident. There’s no way you get a persistent value-add at that level unless there’s a persistent effort behind it,” Williams said.
Under his guidance, the legislature has periodically expanded the team’s investment authority based on earned trust. Over time, the SBA has received authority to expand investments in equity, credit, real estate, public and private markets, and geographic and emerging markets, and it has an increased authority on alternative investments.
Williams has been recognized by this publication with a Lifetime Achievement Award, an Industry Innovation award for Public Defined Benefit Plans above $100 billion, and as CIO of the Year in 2019. He was also recognized by his CIO peers through the National Association of State Investment Officers, with the Richard L. Stoddard Award for his outstanding contributions to the investment of public funds, along with at least seven other distinguished awards from other publications and organizations, recognizing his acumen, leadership, outstanding achievement, and trailblazing.
His retirement decision calls attention to the tremendous brain-trust of chief investment officers who have become bastions at state funds—many of whom are now at, or close to, retirement age, such as Mansco Perry of the Minnesota State Board of Investment, Chris Ailman of the California State Teachers’ Retirement System (CalSTRS), Bob Maynard of the Public Employee Retirement System of Idaho (PERSI), and Matt Clark of the South Dakota Investment Council (SDIC). And it opens the question of whether Williams’ retirement will create a domino effect within the industry and usher in the heirs apparent to come.