New Mexico Educational Retirement Board (ERB) Chief Investment Officer Bob Jacksha may have beaten his peers this fiscal year with 7.29% returns, but that doesn’t mean he’ll sleep any easier in this economic climate.
“In terms of concerns, let me quote the Mad Magazine character, Alfred E. Neuman: ‘What, me worry?’…The answer is ‘yes, I do,’” he told CIO.
Jacksha is particularly concerned about the ongoing tariffs and trade war between the US and China, which he calls “potentially ruinous.” He cited the almost instantaneous stock market volatility the actions of President Donald Trump and President Xi Jinping have created, not to mention that Trump has threatened allies such as France with trade sanctions.
“While I disagree with the method, I have some sympathy for the general thesis of equalizing trade terms,” said Jacksha. He added that the world may have benefited in the long run from the US being at a disadvantage when it was the dominant economy in a post- World War II era. But, he went on, America “should strive for more equal terms of trade” now that the global economy has caught up.
And although there are issues with China that must be addressed, such as intellectual property protection and letting outsiders into their markets, Jacksha’s biggest US policy disagreement is with the Trump administration’s hard-charging approach.
“Instead of engaging with our long-term allies to press China to behave, we are going it alone and using tariffs as the main weapon, while threatening our allies with the same,” he said. “A more conciliatory, participative approach would seem to be more productive, but that is not, unfortunately the modus operandi for our current Washington administration.”
Jacksha is also wary of “broader worries” about China as a rising power “coming into conflict with the established superpower, the United States; i.e. ‘The Thucydides Trap.’” That’s where the faceoff actually leads to war.
The New Mexico ERB chief is not as concerned with the Federal Reserve making a policy mistake, but instead that its actions will cease to be effective in offsetting potential trade escalations.
“We are doing our best to build a robust portfolio that will do reasonably well in a variety of market environments and to have a plan to take advantage of a recovery in the event of a serious downturn,” Jacksha said of risk prevention. “What we do know is that markets will go down….and they will go up. Just not how much, when, or in what order.”
Jacksha’s Secret Weapon
An area that the $13.3 billion fund has shown to mitigate these risks in by diversifying its assets is alternatives. The fund allocates 41.8% to the space, significantly higher than many of its peers, who typically keep around 15% to 25% of portfolios invested in alts (the rest of New Mexico portfolio is 31.3% equities, 25.9% fixed income, and 1% cash).
That high allocation was also the driver behind the retirement board’s benchmark-beating returns, especially in a year where institutions are starting to realize lower or negative returns than recent years. Its top-ranking private real estate program, for example, returned 12.7% for the year ended June 30.
“We have done our best to build a portfolio of diversified risk exposures that will do relatively well in a variety or market outcomes. I say “relatively” because you can’t construct those risk exposures to do really well in up markets and still produce large positive returns in a downturn,” said Jacksha, confirming alternatives as “a main part” of the fund’s anti-downturn strategy. “We feel we are reasonably well-positioned should a downturn take place, but would prefer it doesn’t, of course!”