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Every decade produces an investment manager that captures the spirit of its times. To come to terms with the elephant in the room in the risk-averse world of corporate pension plans, look no further than St. Louis, Missouri.
Flying in to St Louis, looking down over the roofs of its amber warehouses and factories, it is self-evident that this is that shrinking part of America that still makes things. In truth, St. Louis, no longer a manufacturing hub, has had to reinvent itself as corporate headquarters have slipped away, and it has done so with some success. It is perhaps fitting then that, in the shadow of Washington University in the suburbs of the city, NISA, with $115 billion of institutional assets under management, has reinvented the art of fixed-income management.
The story of NISA begins almost 40 years ago with a Washington University finance professor, Jess Yawitz, and his PhD student, Bill Marshall, who joined him on the faculty of the Olin School of Business. Yawitz and Marshall, then in their mid-20s, began to develop a national reputation for thoughtful work on bonds in general and duration and hedging in particular—the precision of their thinking had also spawned a growing squad of acolytes that had passed through their hands at Wash U and ended up on Wall Street. This brought them to the attention of Goldman Sachs, and in July 1985 he and Marshall ventured forth from St Louis for 85 Broad St to oversee the Financial Strategies Group at Goldman. That group was a key part of the genesis of what became Goldman Sachs Asset Management: Yawitz was the first of a series of talented GSAM CIOs, almost all of whom in time found the grass greener outside Goldman.
By 1988, New York had lost its charms for the Missourians, and Yawitz and Marshall moved back home, and opened a 3-person GSAM office. In that first year home, he remembers flying to New York 27 times, an experience at once exhausting and frustrating. However, during their stint at Goldman, Yawitz and Marshall found themselves collaborating with a Milwaukee-based bond manager called National Investment Services of America, which ran dedicated bond portfolios for the likes of Ameritech and US West: when National Investment Services came calling, Yawitz listened. He particularly liked the part where he was promised the chance to run the firm if all went as planned.
Unusually, or perhaps not so unusually in the Midwest, the promise was kept. In 1994 Yawitz and Marshall bought out the Milwaukee owners, and moved all of what was now NISA to St. Louis. This is where the remarkable story that is NISA really begins.
Yawitz and his team at Goldman—Marshall, of course, but also Ken Lester, a quantitative economics graduate from the University of Michigan, and Robert Krebs, another Wash U alum—were pioneering a new science in the late 1980s, bonds as a means to control risk in institutional portfolios. At GSAM, then National, and then NISA, the same group of individuals was cementing the thinking that, a decade later, was to come into its own.
That wasn’t clear at the onset. For all its intellectual firepower, NISA grew modestly. America’s corporate plans were still enamored with equities: the bull market in stocks was, it seemed, a fact of life. PIMCO, BlackRock and WAMCO—the famed bond oligarchy of the 1990s—were sucking all the air out of what fixed-income mandates there were. However, NISA plugged away and, over time, a remarkable track record of alpha generation developed, accompanied by de minimus tracking error. More important still, plan sponsors, consultants and actuaries began to understand that, if you wanted to take real risk out of your portfolio, if you wanted to understand your pension liability as opposed to the performance of your assets vis-à-vis your peers, then you were better served going to St. Louis than New York, Boston, or Newport Beach.
Of course, suddenly—seemingly in the blink of an eye—America’s corporate plans in particular all wanted to talk about their liabilities. The construct that had been in place since the passage of ERISA a generation earlier, where corporate America managed its pension assets as if funding status was of little consequence, simply crumbled as the true costs of plan risk became apparent. The abrupt turnaround had multiple drivers, most obviously regulatory changes, of which the Pension Protection Act of 2006 was the most dramatic. Accounting changes also played their part, as did abrupt and unanticipated equity market collapses. The 2008 crash sealed the transformation, says Yawitz. “We’d been ready for liability-driven investing long before the world was ready for it,” he says. “We’d always talked about the importance of risk control, but the fact is that, for a long time, risky assets did well. When that changed as dramatically as it did, people began to pay more attention to us.”
As recently as four years ago, NISA was managing less than $35 billion. As of mid-2011, the firm is managing $69 billion, almost all of it in fixed income, as well as $45 billion in derivatives overlay strategies. NISA clients are the blue chips of corporate America, including 18 of the 50 largest corporate defined benefit plans. Without question, in a few short years, the firm has become the go-to firm when it comes to LDI and risk-controlled mandates; yet, that’s only part of the story. Perhaps the more interesting takeaway from a day in St. Louis is that NISA has been constructed to manage assets, not to gather them.
Like unhappy families, every asset manager is singular in its own fashion, but NISA is a creature quite unlike any other. The firm occupies two floors in a modern building in Clayton, in suburban St. Louis; no cubicles exist, just open space. Yawitz has an office that doubles as a meeting room, but only an impressive desk (once the property of Goldman Sachs, it is whispered) signals the import of its occupant. David Eichhorn, another St. Louis native who joined NISA from JP Morgan Investment Management in 1999 and who directs investment strategies, sits at an open desk alongside Greg Yess, a former corporate CFO and now the Director of Client Services: The two are capable of finishing each other’s sentences. Lester oversees all the fixed-income and derivatives assets under management; Yess, Eichhorn, and Krebs work at the helm of a 35-person client service team. Each large client has between four and five client service executives attached to it. It’s not the most scalable model; it just happens to be the model that works best for clients.
The firm eschews the organizational rigors that are simply a matter of course elsewhere. Yawitz says he sticks to a single scheduled internal meeting a month—that meeting is the monthly investment committee gathering—and, instead, NISA encourages what he describes as “constant but non-calendarized” interaction. “We are all on the same page here,” he says. “Constantly scheduled meetings don’t help that. That’s how we operate—no circumstance.”
NISA’s real luxury is focus. “We run investment-grade fixed income and we use derivatives. We don’t use non-dollar bonds, and we don’t do high-yield,” says Marshall. “Consequently, we have 135 people in a single office who constantly interact, who focus on a narrow product line. That’s how you get good at things.”
What NISA is good at is almost universally agreed: The firm provides better customized risk-controlled fixed-income solutions for large and sophisticated asset-owners than its peers. The firm sweats the details—“There’s a fastidious attention to detail here,” says Eichhorn—and is meticulous about client service. There is also an overall attitude that is striking. NISA, it is quite clear, doesn’t do arrogance, and Yawitz sets the tone: He is gracious and self-effacing. It is easy to forget that he’s likely the smartest man in the room. Any room.
The question has to be asked as to how NISA, with its 135 employees, can do LDI investing better than the bond juggernauts. The answer is pure Yawitz. “Look, if we were running a total return fund with $150 billion in it, then that’s where we would be focusing all our attention, too. I am not sure our business, as much as we love it, would even get over the bar at some of the giant investment management complexes. Perhaps they have simply got bigger fish to fry.”
If that’s the case, then some rethinking on the “coasts” (a word tossed around with casual disregard at NISA) may be in order, as risk-controlled mandates are, alongside the investment outsourcing phenomenon, where the action is right now in the corporate defined benefit world. NISA executives readily acknowledge that the firm was in the right place at the right time. “It wasn’t enough to have great performance—you got lost in the crowds, particularly as the largest fixed-income managers were growing so fast,” says Lester, “but, long before it made business sense, we were focused on the liability side of the equation, and were prepared to manage assets in a manner consistent with common LDI goals. Then, the markets turned, attitudes toward derisking were transformed, and suddenly the world came into our wheelhouse.”
The NISA take on developing trends is hard to dispute, not least because NISA’s product offering is essentially the result of client input. “The two major trends we see in the corporate defined benefit market are derisking and dynamic derisking,” says Eichhorn (the latter Yess describes as a “blueprint for methodical derisking over time, the result of getting investment committee members in a room when heads are cool and mapping out future behaviors”). “That’s where the mandates are coming from. Every plan is, of course, different, but the incentive, particular for corporate plans, to invest in risky assets is gone,” Eichhorn says. “We’re heading into a world where perhaps risky assets make up no more than about 20% to 30% of a plan’s assets—the preponderance of assets are going to be in long-duration bonds. That’s the world we were made to play in.”
Alpha male
NISA success, at its core, is a performance story—over the last five years, against a long-duration government/credit blend benchmark, the firm has produced annual returns in excess of 75 basis points over the benchmark with a tracking error of 50 basis points, resulting in an information ratio of more than 1.5. Buttressing this best-in-class performance are high levels of customization and client service. Growth of assets presents no problems other than its demands on client-facing resources, says Yawitz. “We have no capacity constraints. In the sandboxes in which we traffic, we can add dramatically to our investments in every scenario we can envisage.” Adds Yess: “If we do have capacity constraints, it is in the startup time with each of our clients. The constraint for us is the number and complexity of the clients we take on, as opposed to the complexity of the assets we invest in. Our relationships with clients are a challenge, not least because they are frequently four-handed—our client, their consultant, their actuary, and us.”
NISA executives readily acknowledge that they are far from the only manager offering efficacious LDI solutions. “However, there remains a first mover advantage,” Yawitz says, “and plan sponsors now don’t want a generic LDI approach. They want customization and they want it done right. We’re managing about $35 billion in LDI for about 90 clients and using between 40 and 50 different benchmarks. We’re better at this than we were only a year ago.” In addition, says Eichhorn, NISA is beginning to win ever-larger shares of the assets of clients: “Clients can give us a significant amount of their assets without exhausting their risk budgets.”
Yawitz, himself a pioneer of immunization a generation ago, acknowledges that some corporate plans will take the logical step beyond LDI and buy terminal annuities. “The theory is one thing, but actual implementation is another. Less than one in five plans will terminate—four out of five will use strategies like ours,” he says. “It’s immensely costly to buy terminal annuities: We can get plan risk profiles close to that of annuitization at a significantly lower cost, and they’ll retain their flexibility.”
NISA is not focused solely on the corporate defined benefit market: The firm manages $10 billion for nuclear decommissioning trusts, and manages bonds for a number of public funds which, says Eichhorn, “have understood the advantages of separating risk in a clearer way. They have significant needs for liquidity, and we create portfolios that they can quickly turn into cash. If and when public funds move closer to mark-to-market mechanisms, as their corporate peers have, then we’ll have a new arena to play in.”
What does this 100% employee-owned firm look like a decade from now? “We are going to get larger and get better, and we’re going to stay focused,” says Yawitz. The fact is, he adds, “we have noncontroversial expectations, except for a demand that we continue to hire high-quality people.”
The term “high-quality people” is a NISA leitmotif. The firm’s proximity to Wash U is an obvious asset: Of the firm’s eight most senior managers, five are alumni. “There’s something about St. Louis,” says Eichhorn. “It seems to create the right environment for our business. It’s easier to resist groupthink here. We like the independence and the quality of life.” Adds Yess, “We’re not interested in bringing someone here from a coast who wants to learn what we do and then leave. We look for Midwestern attributes, and we promote from within: We draw our client service people from all parts of the organization.”
Of course, there are worlds still left to conquer for NISA. For one, the firm is entirely U.S.-focused: It doesn’t have a single non-U.S. pension fund as a client. Its product range is narrow, albeit deliberately so. It spends too much on client service, and its fees are all too reasonable. None of this seems to matter to Yawitz in the least. “Bill and I are 64,” he says. “Speaking for both of us, if someone came to us 10 years ago and asked whether we would still be working in a decade, I would have replied that it would be highly unlikely. Ask me today whether we’ll be working in 10 years, and I’ll say it would be highly likely. It’s that much fun right now. It’s our time.”
—Charles Ruffel