April 1, 2021

How CIO Sean Bill Is Successfully Revamping His Portfolio

With good results in hand, he is shifting the allocation of his California transit agency pension fund and health care trust, aiming for still better performance.

Reported by Larry Light

Art by Robert Hunt

Sporting an amiable wit and well-honed insights, fund chief Sean Bill is a sought-after TV guest, logging appearances on CNBC and other outlets. And the CIO of the Santa Clara Valley Transportation Authority (VTA)—which to the rest of the world means California’s Silicon Valley—has delivered good returns for the agency’s pension program ($1.1 billion in assets).

The fund may hardly be a giant, but Bill has bested public plans’ mean performances over many years. US public pension plans delivered 1.8% on average in fraught fiscal 2020 (ending last June 30), by the count of the Center for Retirement Research (CRR). The VTA, however, returned 7.2%. In fiscal 2019, the national average was 8.9%; the VTA was up 17.1%.

In other words, Bill is someone well worth listening to. That’s both for his social media commentary and his podcast, as well as for the investment strategy at the fund he runs so well. In a recent post, for instance, he detailed how the Citigroup Economic Surprise Index has had difficulty in recent times syncing up with what really happened in the stock market. In another missive, he charted how Bitcoin’s correlation to the dollar is extremely low.

What’s especially interesting about Bill is how he is reshuffling his portfolio, top to bottom, to goose performance even more. He is shifting the retirement program’s equity assets away from active investing into index funds, with a strong emphasis on international stocks, plus a healthy dollop of emerging markets (EM) exposure. Meanwhile, he has pulled his fixed-income allocation away from corporate bonds and into private credit. For real estate, more lending and less owning are his goals.

His rationale for hanging onto bonds, of which he keeps 3% of his holdings in Treasurys, despite their low yields, is to serve as a ballast against other risk in the portfolio. In Bill’s parlance, “They’re the least dirty shirt in the hamper.”

Over the past couple of years that Bill has been effecting all these changes, he has closed out 10 outside accounts. “This is a way of simplifying the portfolio and reducing fees,” he said. And, of course, improving risk-adjusted performance is the key objective. The VTA’s funded ratio, at 78%, is well ahead of the average for US public plans (71.5%), according to the National Association of State Retirement Administrators (NASRA).

Nowadays, stocks worldwide are doing OK, although not as spectacularly as in some years past. Bill’s equities are in the Russell 3000 for the US (rising 6.3% year to date), the MSCI EAFE for developed nations (ahead just 3.2%), and MSCI Emerging Markets (up 1.9%). “There’s not a lot of alpha,” Bill remarked on the decision to shift from an active to a passive strategy.

Bill, working from home mostly, is a one-person operation at the moment, a self-described “solo capitalist.” One member of his three-person team retired and the other was transferred. Before joining the VTA—the operator of buses and trains in Santa Clara County, south of San Francisco—in 2012, Bill had a wide-ranging career in the finance field.

A graduate of the Stanford Executive Program (SEP), he worked on the agriculture floor of the Chicago Board of Trade, as a senior bond trader at money management firm Bradford & Marzec, and as global macro investor at Schonfeld Securities and Crowell Weedon, focusing on international fixed income, currencies, and commodities. These days, he also helps out at AngelList, which provides venture funding for startups.

Here are Bill’s takes on the various corners of the investing world, and on VTA’s portfolio:

Domestic Stocks. Overall, in December remarks to CIO, Bill thought their outlook was “trending positive” because of solid corporate fundamentals. He didn’t expect the Federal Reserve to alter its dovish policy nor the incoming Biden administration to back off from its promise of big spending. And he was right. “The markets are flooded with liquidity,” he observed.

The pandemic, despite the misery it has brought, at least has accelerated digitizing society, he noted. “When you’re looking where to park your capital, the US is best,” he said, pointing to the nation’s adherence to the rule of law and its innovative spirit. “That’s why 60% of Mideast sovereign wealth fund assets are in the US.”

Institutional investors “will remain with a bias toward the US,” he said. “Any turmoil in the world, and the US is the best place to be.”

Fixed Income. “This has been a massive drag on our portfolio,” Bill said. “It doesn’t get much of a return on capital.” He groused that bonds, meaning the Bloomberg Barclays US Aggregate bond index, or the Agg, are down 3.4% this year, after returning 7.5% in 2020. The best that can be said for Treasurys, whose benchmark 10-year yield has risen to 1.69% (still low, in historical terms), is that they are “liquid.”

For that reason, Bill is intent on pumping up his allocation for private credit to 9% from the 1% the fund had at year-end 2020. This asset, which he indicated can return a decent 8%, has another virtue: low volatility. Lending to small companies, forsaken by large banks after the 2008-09 financial crisis, has enjoyed a growth spurt of late.

Real Assets. Here is an area that tends to deliver well in the fullness of time. The standard thesis for real assets: Buildings generate rental income and, after they appreciate, can be sold at a tidy profit. Unfortunately, long-term trends, coupled with the economic fallout from the virus, have visited woe onto one-time choice segments of commercial real estate, upending its winning formula. And even in 2019, Bill said, some parts of the retail asset class “were being marked down, and had negative quarters.”

At present, Bill said, the worry was that the office sector will turn into what many retail properties already have become. Namely, sink holes. That’s why, he added, “we want to reduce our exposure to core real estate.” Investing in office space, he said, “makes me nervous; it currently feels a lot like retail did pre-markdowns.”

Fears abound about excess office space post-pandemic, because too many staffers will want to remain at home, a scenario that suggests future rental income will be diminished. “Tenants want short-term lease renewals and are also requesting improvements,” which come from the landlord’s pocket, he said.

Part of VTA’s new commitment to private lending, Bill said, is for real estate. One recent investment is in a solar farm outside Boston. The asset is A-rated, he said, and throws off an 8% yield.

Looking outside that proverbial box is Bill’s specialty. “My mantra,” he said, “is to think like an entrepreneur with institutional resources.”