OPERS keeps it simple and succeeds

Brad Tillberg, chief investment officer of the $8.7 billion Oklahoma Public Employees Retirement System (OPERS) is only the second chief investment officer in the fund’s 45-year history. Perhaps even more remarkable, OPERS’ 13-member investment board, responsible for overseeing strategy and manager selection, has had only two chairs in more than 30 years.

This stability has brought a continuity and consistency to the fund’s leadership. Strategy continues to prioritise traditional investments, with passive strategies in equities and bonds, over private markets and active, skills-based investment.

In the latest rebalancing of the portfolio, assets have been split between US stocks (recently reduced to 40 per cent), international stocks (increased to 28 per cent) and domestic bonds (32 per cent). It’s a no-frills approach that Tillberg says still does exactly what it is meant to do.

The fund’s asset allocation is decided according to three main themes: asset allocation is the key determinant of risk and return of the overall fund; diversify by both asset class and within asset classes; and passive funds are suitable investment strategies.

No need for alternatives or private markets

“I don’t believe we are a conservative fund; we are a traditional fund,” Tillberg says in an interview from the fund’s Oklahoma City headquarters. “Conservative implies there is no risk in the portfolio and we do have risk, because we need this to reach our assumed rate of return. However, we are lucky because we have not been subject to the competing philosophies that come with leadership changes.

“You can have a portfolio that gets you to where you want to go without having to go into alternatives or private markets, and our board is extraordinarily sensitive to fees. We can do what we want to do with a traditional portfolio and the results speak for themselves.”

The fund has returned 9.41 per cent in the fiscal year to date, while the 10-year annualised return is 5.92 per cent as of the end of March 2017. Fees come in at 9-13 basis points, Tillberg says.

OPERS administers two defined benefit plans and two defined contribution plans. The largest defined benefit plan is the system’s namesake, the OPERS fund.

The system uses indexing for its domestic equity mandates (the Russell 1000, and Russell 2000 – the large OPERS fund doesn’t use the Russell 2000), its international equity mandates (MSCI All Country World Index ex-US and MSCI ACWI ex-US Growth), and its fixed-income mandates (US Treasury Inflation-Protected Security Index), with BlackRock now providing the four passive mandates for the OPERS fund.

The fund also has nine pure play long-only active managers in US small-cap equity and fixed income, plus three “in-the-hand” index managers, where Tillberg keeps a close eye on tracking errors.

“We emphasise beta exposure and diversification,” he explains. “We de-emphasise active management at the fund level, but we maintain selectivity in areas where we do employ active management. It’s a philosophy that allows us to control the things we can control.”

About 42 per cent of the US equity exposure, 68 per cent of the international equity allocation and 11 per cent of the fixed-income allocation is indexed.

Publicly traded markets mute risk

The manager roster comes to 16, while back in Oklahoma City, Tillberg is a one-man investment team, although he is quick to highlight the importance of the fund’s investment consultant and, of course, the board in decision-making.

“The level of sophistication on our board is strong,” he says. “Our investments are managed with a healthy dose of common sense and that goes a long way. We have the discipline to know what we can and can’t control, understand that the decisions we make have a big impact, and know the importance of maintaining discipline throughout market cycle.”

He also argues that keeping it simple reduces risk.

Like all large institutional investors, OPERS’ risk exposure runs the gamut from interest rate risk to currency and liquidity risk and geopolitical risk. Yet because the fund’s entire exposure is either to publicly traded markets or in vehicles where the underlying investment is publicly traded, risk is also muted.

“This transparency really serves as an additional risk-control function for us and I think this is probably unappreciated in the market,” Tillberg says. “Our portfolio is marked to market every day. By avoiding private markets, we [avoid having to] worry about operational issues like valuation methodologies and concentration in fund holdings, or structural fund risks or key man risk or cash drags or leverage usage. We are geared towards equity beta, no doubt about it, but also hold sizeable fixed income that dampens that volatility.”

OPERS’s success with such a straightforward approach has made Tillberg sceptical of more innovative investment styles.

“Buyers should approach innovative investment products with scepticism,” he argues. “One could have a highly effective portfolio with everything that exists today. One could also get into a lot of trouble with everything that exists today. It is our job as fiduciary investors to understand where a product fits within the portfolio and not just buy the latest product.”

Does he plan to introduce more active strategies, given today’s expensive equity markets and predicted low returns?

“We’re doing just fine at a fraction of the cost,” he concludes.