Hands on investment experience overseeing a large, a mostly internally run investment program, AUM with layers of complexity that targets a 7 per cent rate of return; leadership skills and ease under the media spotlight and monthly board scrutiny plus the ability to commit for at least five years. The role of CalPERS next CIO isn’t for the faint-hearted.
The $469.8 billion pension fund has been without a permanent CIO for a year following the resignation of Ben Meng in the wake of regulatory filings disclosing he had invested in shares of private equity managers with which the pension fund had invested in the past. A search last year was abandoned because of challenges inherent in recruiting during the pandemic and issues with the compensation package – since resolved to now include a long-term incentive approved by the board. Still, discussions at the July board meeting on the key characteristics the board seeks in its new CIO offer a revealing window into the task and trade-offs that lie ahead.
Drawing on CIO data from 100 global asset owners in CalPERS’ peer group, Charles Dore, chief executive and founder of executive search agency Dore Partnership tasked with filling CalPERS empty CIO seat, highlighted the challenge afoot.
Dore’s analysis of the world’s top 100 institutional investors finds 82 have incumbent CIOs – out of those that don’t five have an open vacancy while 13 (mostly SWFs in the Middle East and Asia) don’t follow a traditional CIO structure.
Of the incumbent 82, around 54 per cent were appointed in the last three years; 63 per cent were appointed internally and the overwhelming majority are men. Over two thirds of incumbent CIOs hail from the asset owner community with the rest split between asset management and other backgrounds like banking or government.
Delving further into the data, Dore’s analysis found only 31 per cent of the sample 100 asset owners have, like CalPERS, a 7 per cent rate of return – and two of these funds (Yale and Washington State Investment Board) are without CIOs.
Of this ever-smaller cohort, the average AUM is just $158 billion, and the typical CIO tenure is just over five years. Again, CIOs in this handful of highly performing asset owners are also, overwhelmingly, white and male. Of the top performing CIOs in CalPERS’ immediate peer group, 50 per cent managed less than $25 billion and one third managed less than $10 billion in their prior role, indicating that scale is not a factor in predicting long-term investment success.
Still, the CalPERS board will have to reconcile that with some members’ priority that the new CIO has experience managing a large AUM.
Cue Dore’s counsel on the importance that the board keep an open mind, considering candidates with experience of managing small AUMs and mindful of the benefits of hunting for talent among current deputy, or rising CIOs, rather than only fish from a pool of proven CIOs.
“Around 48 per cent of performing CIOs were recruited internally – they were not CIOs before their current role,” he said, adding that assets under management is too rudimentary a proxy and that many of this group have also come from overseeing a single asset class. That said, all agreed that direct investment experience was vital.
“We are looking for a big I in CIO,” said CalPERS CEO Marcie Frost.
Any trade off regarding diversity will be just as difficult for CalPERS board. Board member Margaret Brown flagged that the data points to this being one obvious casualty of the process.
“It’s very clear this is going to be challenging,” she said, arguing that pushing for female candidates or historically underrepresented groups will make the candidate pool even smaller.
“While we are all big on DEI, the most important thing we are looking for is qualified candidates.” This might mean not hitting on the diversity piece, she said.
“If that’s what we are searching for, no wonder that’s why we came up empty first time around.”
Against Dore’s insistence that the search company would “lead a systematic A-Z search” and “if the market has diversity to offer” the firm would capture it, other board members pleaded for diversity to be a centre piece in the search.
“It is incumbent on us to ensure we have diversity at the highest level of investments,” said Stacie Olivares. “We have seen time and again when there is diversity there is outperformance.”
Dore will conduct a data and reference-led process that will include people on career breaks targeting end of September for the first round, and an early March 2022 joining date. Dore added that the search process will also seek candidates with a succession plan, able to build continuity and with a track record of elevating others.
“It is very important we find someone aligned to the mission of the organisation.”
Once the latest criteria are approved, board president Henry Jones will select a committee to conduct the first round of interviews along with Frost. Final interviews will be conducted by Frost and the full board. The board and the CEO share the hiring of the CIO who will report to Frost.
CalPERS’ next CIO must be just right – but it remains to be seen whether the fund will get its fairytale ending.