In-Depth: Michelle Cunningham and the Evolution of Institutional Investing

CalSTRS retiring deputy CIO recounts significant changes in the investment management industry during her career.

When she retires on New Year’s Eve, California State Teachers’ Retirement System’s (CalSTRS) Deputy CIO Michelle Cunningham will leave behind a 35-year investment legacy that revolutionized a woman’s role in the field.

Cunningham’s 27-year career with the fund began in 1991, when she signed on as an investment officer for fixed-income. Not only was she CalSTRS’ first internal investment officer, but also the fund’s first female investment officer. Cunningham managed various portfolios, including mortgage-backed, US Treasury, foreign currency, and securities lending until she was promoted to director of fixed-income in 1997. In 2012, she crossed another bridge when she became CalSTRS second deputy CIO. When Cunningham first joined CalSTRS, the fund was $35 billion. As she exits, the fund’s value has grown to $215.3 billion as of September 30—currently the largest educator-only pension globally.

“It’s been an exciting time,” she told CIO. “In 1992, we expanded our asset allocation to include non-US stock.  We’ve increased our internal investment staff from about 30 people to 150, going on 160. Reaching a fund total of $100 billion was exhilarating. Then began the rollercoaster ride: under $100 billion, over $100 billion, and again, now we’re over $200 billion strong.”

Cunningham said that a major initiative since 2010 has been to bring as many assets in-house “as can be reasonably managed with a pretty lean staff compared to our fund’s assets. I think we’ve achieved a good balance at CalSTRS between managing money in-house and through external managers, the two complement each other,” she said.

Early in her career, Cunningham noticed the lack of diversity in the investment world. Not only were there virtually no women in investment management companies or on corporate boards, but there were even fewer minorities.

“In the beginning, as a 25-year-old woman in a male-dominated field, it was challenging, but I had a real passion for the business. I kept plugging along and speaking up.  You develop a thick skin,” she said. “I was fortunate enough to have several mentors in my career that were extremely supportive. However, I can tell you I went to lots of meetings over the years where it was assumed I was more of an associate where people would only talk directly to the men in the room.”

Today, more than half of CalSTRS’s staff, including more than half of the investment management team, are women.  “It’s thrilling to see the change, although I think I take the increase for granted having worked here for 27 years,” she said.

In transforming the fund’s assets to unprecedented heights, Cunningham and fellow CalSTRS staff invested in liquid assets, private assets, and fixed-income.

“I’ve been in the business about as long as Michelle. When I look back, I am most surprised to see the significant returns we got out of fixed-income,” said CalSTRS CIO Chris Ailman. “From way back in 1988, we expected it to be a low-returning asset class, yet I bet cumulatively, over the past 30 years, it’s probably had double-digit returns. One factor, for sure, has been the massive decline in interest rates. We’ve had a 32-year steady decline from very high interest rates to now a 30-year low.  To me, that’s staggering.

The two had joined CalSTRS during the birth of the Reagan Administration just as the US was coming off the 1980s oil embargo. Ailman mentioned that another surprise he and Cunningham have experienced is the value of equities.

“I remember the Dow was about 1000, and then it dropped to 700—that doesn’t sound like much right now, but that was a 30% decline— ,” Ailman said. “Even with the global financial crisis and the internet bubble, the 1980s and 1990s were an amazing time to be long equity and fixed-income.”

In her last year at the fund, the majority of positive returns are coming from private equity and equities, both regionally and globally. In response to this observation, Cunningham and Ailman agree it’s about the long-term vision.

“One of the benefits of being a pension fund is we don’t invest with too much of a short-term view. We are focused on the long-term growth in assets, especially since our members live 20 or more years in retirement,” Cunningham said. “I think investing in a majority of assets that have a growth tilt to them, and readdressing our asset allocation every three years—to make sure we’re still on track with our market assumptions—and making very subtle course corrections are a few hallmarks of long-term investing.”

“We’re in a seven-year period of unprecedented central bank stimulus. With federal funds that went to zero and now easing back into the marketplace, it’s been a ‘risk-on’ environment for equity-like assets. Even though the GDP has been terribly low, I think people are surprised at the stock market and how it’s rebounded so dramatically,” Ailman said, before reflecting on a key decision CalSTRS made involving growth assets.

“I remember when Ben Bernanke came out and talked about lowering interest ratese called an all-hands-on-deck meeting right then and there,” he said. “We made a decision right then, as a team, to tilt toward growth assets. Obviously, private assets have taken longer to recover. However, when you decompose our returns, you’ll see that they’re really driven by our 55% weighting in global equities—that was intentional.”

Ailman went on to say, “Another subtle course correction we took back in 2004-2005 was to keep our home country bias. Acting in our roles as both a government pension fund and senior investment managers, we decided to stay overweight in the USA, even as our peers allocated their assets more globally. We stuck with a 60-40 split of two-thirds US, one-third non-US.”

When it comes to innovation, Cunningham and Ailman agree there are two specific factors that help bring a fund to the level of CalSTRS: technology, coupled with a diverse culture of shared values. From when they both started, the staff was a fraction of what it is now—and the technology may as well have been limestone and chisels compared to software such as Aladdin.  CalSTRS formalized a system of core values in the early 2000s and positioned the fund’s structure around them, which they attribute in part to the fund’s success.

“Our organizational culture is so important to us. We add 10 to 12 people a year to our team who we choose not just based on skills and experience, but whose values fit the type of work environment we promote. Perhaps that doesn’t sound very innovative, but to me what we’ve done as a government organization is unusual and fairly unique. We survey staff every couple of years to assess how well we are doing as an organization in meeting our values, and whether or not our current values are still right for the organization,” Cunningham said.

Fifteen years ago, the fund took on a project where members of the roughly 40-person staff were asked to define their most important values in order to boost the success of the company, which the organization then implemented. “We still maintain those values,” Cunningham said. “We continually ask the questions: Are we still fulfilling those values? What are we the best at? What can we do better? Keeping everyone on the same page in terms of the culture of the organization I think sets us apart from others.”

“When I look, I agree absolutely that our competitive advantage is our culture. I think that’s been proven out and I think culture drives alpha. In terms of innovation, look at technology. No more paper tickets, no more filing cabinets,” said Ailman. “It’s probably because of digitization that you can now run $200 billion with a lean staff; before we had one person per billion. We’ve already seen, and I suspect will continue to see, amazing efficiency gains. As we joke, now we turn on a whiteboard and send the notes straight to our computer—no more flip charts!”

When it’s all said and done, Cunningham will leave behind a legacy of investing that helped bring a public fund to unprecedented heights, and a trail of overcoming the odds and garnering deep respect from her peers. From growing CalSTRS to the largest global teacher’s retirement fund to paving the way for female investment officers, Cunningham’s impressive career  sets a high bar for aspiring institutional investors. Although a replacement has yet to be announced, in the eyes of her organization, she’s irreplaceable.

“I think Michelle is one of the few almost three-decades-tenured investment people at a state fund where the turnover is normally very high. It’s a tough environment. She has been a tremendous asset to us. She has moved from an investment officer in fixed-income to my trusted deputy who I count on immensely. She’s had a tremendous career, especially in such a male-dominated field, and it’s going to be a big loss for CalSTRS. It’s going to leave a hole that will not be filled,” Ailman said.

Happy new year, Michelle—and a wonderful retirement at that.

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