“Although already well funded—92% as of Dec 31, 2010 and performing strongly over the last three years with a 18.9% return as of Jan 31, 2012— ________ have sought to improve their asset allocation and diversification, moving meaningfully into private equity and real assets over the last couple of years.”
You’d be wrong if you thought that the above paragraph referred to some Satyr-like stepchild of a well-funded corporate fund and an aggressive endowment. No, this description—an actual nomination received for the 2011 aiCIO Industry Innovation Awards—is in fact referring to the most lambasted of capital beasts: a public pension. The Employees’ Retirement Fund of the City of Dallas, Texas (“Dallas ERF”), to be exact.
That a public plan in 2012 can be nearly 100% funded will come as a surprise to many—especially those who have long-ago labeled the public pension model anachronistic, illegitimate, or worse. How they’ve done it, however, is far from surprising. It starts with a sponsoring entity willing to fund the plan, of course—but, as always, it also depends on a competent board and staff, solid investment decisions, and the willingness to step away from the herd that surrounds it.
“It all starts with our board,” says Cheryl Alston, the fund’s Executive Director. “It consists of seven individuals. The majority are investment professionals appointed by the Mayor, plus the City Auditor. The employees appoint the remaining three, but here’s the key—they are also all finance professionals.” This stands in stark contrast to some other (unnamed) public pensions in America. Its composition, if not its more formal governance, resembles the public pension entities of Canada, the Netherlands, and the Nordics, all of whom are cited as the best the world has to offer in managing retirement capital.
Alston, who joined Dallas ERF after an investment-banking career at Chase and CIGNA Retirement and currently serves as Chair of the Investment Committee for Christus Health and is a member of the PBGC Advisory Committee, started her first public position in 2004. “I have been in this position for eight years now—I can’t believe it, neither can my husband—which means a whole market cycle. We’ve seen the highs and the lows, and the board has always been very measured and diligent in reviewing investment performance—and not overreacting to bad performance, still willing to look at opportunities. That’s’ really helped.”
Perhaps not surprising for a public plan is the size of Dallas’ investment staff. If there are two things that are almost universally true about public pensions in America, they are this: the sponsoring entity doesn’t pay what it has promised, and there are too few people managing the assets. Indeed, the Dallas investment staff can sit around a small table with room to spare. It doesn’t seem to bother the ever-sunny Alston, however. “For the $3 billion we do have, I lead an investment staff of three people—myself and two others,” she says. “We do all asset classes, and the knowledge of all asset classes is extremely helpful in the allocation process. We conduct all of our manager due diligence, along with Wilshire,”—the fund’s investment consulting firm—“but in the end it’s the staff kicking the tires ourselves to evaluate managers. It’s a quality staff accountable for results.”
This combination—a professional board and an accountable staff—allows the fund to execute on Alston’s overarching philosophy, one that she credits with the recent success. “Our approach to investments is very conservative but also contrarian,” she says. “It’s interesting: When I look back at the downturn of 2008, one of the things that is important to us is liquidity. We have to pay benefits, but the ability to move around during different market environments is important. After the downturn, we had liquidity and went into core real estate funds near the bottom of that market, which has done very well.” In 2009, the fund continued its contrarian ethos and increased its holdings of high-yield debt, which has done “tremendously well.” The firm also invested in a number of secondary private equity funds and was committed to capital calls when other funds were running for the hills.
“Liquidity and the flexibility to invest when others can’t is really good,” Alston adds. “We really try to avoid the herd mentality.” The fund has some ideas it thinks will serve it well going forward as well: Global equity and international managers are undervalued right now, Alston thinks, and the general falloff in woman- and minority-owned firms post-2008 presents an opportunity to be contrarian and re-analyze this sector. “We are toying with different names for a program (that focused on women-and minority-owned firms),” she says, “but we want to find investment expertise. We want to find the new Acadian or Oaktree or Blackrock.”
To find such potential gems, Alston sticks with what has worked in the past. “If I don’t get it, it’s too complex,” she says. “The mantra helped during the downturn. We have avoided some of the potholes. If you avoid losers, winners take care of themselves—that’s what we think.” A simple mantra, and—along with other methods employed by Dallas– one that more public funds will surely be following as the alleged public pension funding crisis continues.