David Villa, executive director and chief investment officer of the State of Wisconsin Investment Board, passed away on the weekend.
David Villa was a unique thinker and generous with his ideas. It was hard not to be swept away by his passion for change.
We had a close working relationship which was predicated on his deep thoughtfulness and desire to improve outcomes for his members and the many other pension fund members around the world for whom his peers managed money.
I first interviewed David in 2009 and more recently he has been a member of our international advisory board. As with many relationships, the recent customary use of zoom meetings allowed me to see the more private side of David and we discussed his love of music and his vast guitar collection.
He’d flick me emails telling me our website was slow, or that he wanted to put forward a colleague for a speaking spot at one of our events or to share one of his many ideas on how to improve pension fund processes and behaviours. He was engaged and thoughtful.
David has been with SWIB since 2006 when he joined as chief investment officer and was named executive director in 2018.
In my first interview with him in 2009 we discussed manager selection and monitoring, in-house investments, costs and risks; themes that resonated in every conversation as we ruminated over a path to pension efficiency.
At that time David was campaigning to emphasise the importance of allocating capital according to risk instead of dollars, and to question each investment’s contribution to risk.
“Risk is the same as loss. Many think of risk as volatility, the swing, but it’s the risk of really bad stuff happening,” he said at the time. “In Wisconsin we hunt deer from the age of 9, and from then until the age of 85 you could keep track of your hunting results, measure the distance of where you shot from and the hit rate. But the real risk is a bear coming into your tent in the middle of the night and waking you up.”
In 2010 SWIB announced a new asset allocation strategy that included the use of leverage and risk parity, something that was broadly criticised in the local media which accused the fund of gambling with taxpayers’ money. But it was innovative in the pension world and something that David and his team had been contemplating for about three years.
At the time SWIB’s allocation to equities comprised about half of the core fund’s assets but 90 per cent of the total fund volatility, so the rationale was to trade a reduction in the allocation to stocks for the lower risk of fixed income. The new allocation shifted its allocation out of equities into fixed income and added leverage.
This approach also led to some meaningful relationships with managers and the ability for the fund to call on its managers’ knowledge and expertise. This ultimately resulted in its in-house team running levered strategies itself.
This innovative and brave approach, under David’s guidance at Wisconsin, has also spilled out to other funds, with the Public Employees Retirement Association of New Mexico a notable example in building a risk parity approach using leverage. The approach has been a big contributor to SWIB’s fully funded status.
David was a lifelong learner, with degrees from Princeton, Stanford and Northwestern universities. He was academically minded and thorough.
In 2013 David presented the results of a study he had worked on for two years with Sorina Zahan, partner and chief investment officer of Chicago-based Core Capital Management, at the Top1000funds.com Fiduciary Investors Symposium.
Drawn from two years of research their study into benefit design developed a mathematical framework to compare the different vulnerabilities and returns within defined benefit, defined contribution and hybrid pension schemes.
David showed how hybrid pension schemes, combining both defined contribution and defined benefit characteristics, are best for governance because they align interest of both employees and sponsors. Importantly he highlighted that the funding crisis in the US was a result of bad governance. It’s another example of his commitment to the fact he was managing other people’s money but also a commitment to investigating efficiency and challenging the status quo.
Back in 2016 the fund’s strategy was built on a two-pronged attack; building a portfolio of hedge funds that aimed to provide a higher quality source of alpha on top of existing market beta exposures, and continuing to building an internally managed, multi-asset division to provide a diversified source of return generation.
Under David’s leadership, the $120 billion fund has grown its internal management from 21 per cent to over 50 per cent of assets, generated strong returns at a lower cost than its peers, and during the last five years added $1.9 billion above its performance benchmarks.
Managing liquidity was always front and centre of his tenure as CIO which was not only a risk management tool but an opportunity, with Wisconsin able to provide liquidity in times of crisis. More recently he emphasised the discipline of rebalancing.
SWIB is unusual as it does not have an automatic rebalancing process, rather the senior investment team votes every month on the portfolio positions. While it does have limits imposed by the board, they are pretty wide and it’s rare to bump up against them.
“At this moment we are fearless rebalancers,” Villa said as the COVID crisis hit in April last year. “A lot of return will come from being willing to rebalance without worrying about what might happen. We are also very liquid. Our asset allocation is built around publicly traded securities so we are extremely liquid, and there are deep derivative markets that allow us to rebalance synthetically. Fourteen years ago it would take us eight weeks to rebalance, today it takes us less than 24 hours.”
Under David’s leadership, the State of Wisconsin Investment Board has become renowned for its diverse investment strategy, internal management, benchmark-beating results and fully funded status. More recently the Madison-based fund also leads peers in investment management technology.
David was always looking to the future, and more recently that included some monumental transformation of the internal systems and the use of technology to manage and monitor the portfolio. He was a bright light in bringing public pension fund processes in from the dark ages. More recently David was working on the internal technology systems and building Wisconsin into a first class funds management firm by building a data warehouse, improving data governance, upgrading the performance analytics engine, centralising the portfolio engineering function and upgrading technology platform for private equity.
The last time we spoke, in December last year, he was contemplating the impact of the COVID-19 crisis and the continued ignorance and inability of the finance industry to look beyond traditional models in assessing global risks.
“Global health networks faced pandemics and potential pandemics in the past with Legionnaires disease, AIDS, bird flu, SARS, and MERS but going into 2020 the market, press, and others acted as though nobody anticipated a COVID-type event. What bothers me is what other risks may exist in plain sight that the marketplace underestimates?” he says.
“Climate change and ocean acidification is disregarded. War ships on alert and in close proximity in disputed regions of the oceans add uncertainty. In the background of these risks, the financial promises made to workers to partially replace income in retirement may need to be broken by governments that have failed to properly fund public pensions. The consequences of this myopia will not be felt next quarter or even next year but can easily become a crisis within the next two decades.”
David Villa is well remembered and will be missed.