“I think we as an industry are failing,” said Scott Evans, deputy comptroller for asset management and CIO of the Office of the New York City Comptroller, at a panel on pensions at the SUNY Global Center on Thursday in Manhattan.
During the discussion, titled “Pensions in Doubt?,” Evans noted that, in a time where very few have access to full retirement benefits and people must be more self-reliant on their personal savings, the emotional distress of sticking to an investment plan and following through with it is the main reason future retirees need professional financial advice.
“The problem most people have is they can’t stomach buying things that are going down. They can’t take the risk. They have to have too much cash in the bank, and they can’t take looking at their statements going up and down all the time,” he said.
He mentioned how pension plans like his father and grandfather had earned worked for their time because most people were employed by the same company for the majority of their careers, with few exceptions—one being University professors, although their systems worked for them as well.
“Almost no one has access to that today,” Evans said. “We have to save for our own retirement, get a little help from the company, put it in a 401(k) vehicle—but it’s our own decisions that guide them and, as a society, we suck at these decisions.”
On how the general population can improve this situation, Evans recommended lifecycle funds, also known as target date funds, as their best option. Once their age group and funds are put into an account, a person’s fund strategy will adjust via a professional fiduciary as they grow older and subsequently move into other age groups with different investment goals. For example, young investors fresh out of college would see portfolios with more high-risk investments, where those closer to retirement age would have portfolios holding more low-risk investments.
“It’s sort of set it and forget it. It’s good, and leaves you generally in the right direction and you can be far better off than if you’re left to your own devices,” Evans said.
Reaching for Pension Yield
When asked how he’s reaching for yield within the NYC pension funds, Evans said, “We’re living in a period of time that’s extraordinary. We’ve never gotten paid less to lend money to other folks,” speaking of the “extraordinarily overvalued” fixed income security markets that he’d normally use as insurance against inflation and deflation.
As a result, Evans explained that he is holding less credit debt than he typically would, “because you’re getting paid a very low spread relative to history.” He said he’ll also be holding fewer mortgage-backed securities over the next few years, because the Federal Reserve’s activities have been shrinking the premia. To give his portfolio “insurance,” he holds a bit more in “very liquid” treasury securities. “That seems counter-intuitive because treasury securities, as we know, are incredibly overvalued. But they’re very pure insurance for you. And if things happen to return those credit spreads to normal, it won’t affect the treasury securities. You can control the sensitivity of treasury securities to inflation very easily,” he said.
For risk assets, he said he’s holding “high-yield securities, other types of leveraged loans, etc.,” and “making sure that we spread out our bets and that we’re not concentrated in any type of risk premium security. So, we’re holding a more diversified portfolio than we would otherwise.”
Despite the careful allocation, Evans isn’t overly optimistic.
“We’re trying to condition everyone who depends on the returns that we’re going to go through a period of time when we have sub-par returns. On the fixed income side, there is almost no escaping it with rates today,” he said.
While Evans calls long-only public equities the workhorse of the New York City portfolios, for delivering risk premia over time, diversified across the US, the funds also invest in developed markets measured by the Morgan Stanley EAFE Index. The funds also invest in emerging markets, but not as broad as the market itself due to reticence from the funds’ board members, which stems from legal practices, among other things.
“We stay pretty close to the long-term allocations across these three sleeves of activity,” said Evans, who likens his pension fund to an ocean liner that stays the course and doesn’t make sudden movements. “The outlook for non-US sectors is a little better.”
“The prices are a little better relative to earning, so you’re getting more earnings for your money, particularly in emerging markets,” Evans said. “The growth of the economies, particularly in Europe, is lagging the US a bit, so it’s just picking up steam where it’s fully recognized in the US and US multiples. The prices you’re paying for earnings aren’t going to break your knuckles.”
With 70% of the fund’s portfolio trying to capture risk premia, 15% in defensive securities, and the remainder in assets that perform well during inflation, Evans considers the portfolio’s allocations to be “fairly conventional” for a pension fund. There is, however, one “quirky” New York law that prevents all public funds from investing more than 25% of their portfolios in alternative asset classes, which it calls “basket securities.”
“It’s a quirky thing that’s unique to us. The important thing about it is it keeps us from holding as much illiquid securities as we would otherwise like to do,” Evans said. “It’s a constant conversation that we have with the New York State Teachers [Retirement System], New York City Common [Retirement Fund], and we have with the governor in trying to get relief from this.”