A year ago, the Alaska Permanent Fund appointed its first dedicated chief risk and compliance officer, Sebastian Vadakumcherry. With current investment conditions, and a move to a more conservative outlook, the relationship between Vadakumcherry and CIO, Marcus Frampton is proving its worth. Amanda White looks at the fund’s approach to risk, its outlook for capital markets, and how data will give it an edge.

In October last year Sebastian Vadakumcherry moved to Juneau, Alaska to head up, and create, the Alaska Permanent Fund’s first separate risk management function. For the best part of the past 24 years – with the exception of a five-month stint in Ohio at a credit card company – he worked in the Middle East, most recently heading up risk management at the Gulf Investment Corporation in Kuwait. It’s quite a dramatic shift geographically, but Vadakumcherry says he is buoyed by the opportunity to build the risk function from the ground up.

“I love the build aspect of the role, starting the function from scratch,” he says.

“The way I look at the risk function the primary role is as a business protector, for capital preservation. But that can’t happen without the business enabler part. I don’t want to be a policeman in the organisation, I want to be a partner. A successful strategy is to engage with investment teams right at the beginning. Funds managers know best, but there is always another perspective and success comes from having people accept that different perspective.”

CIO Marcus Frampton says the investment team has much better data on the portfolio as a result of the establishment of a risk management function, which he calls a big step.

But there is still a lot to do to improve data at the fund, particularly given its high allocation to private, and direct investments. The fund uses Aladdin, which Frampton says has “some gaps on the private side”.

“We have more than 100 GP relationships and have co-investment and direct investments. The risk system doesn’t really capture anything other than manual upload, it’s very basic. The world is rich in data but we’re not really capturing it on a centralised basis,” Frampton says. “We need a couple of full-time people dedicated to data, cleaning it and getting it in the system. It’s a big project.”

This need for better data fits into one of Vadakumcherry’s three strategic risk priorities for APFC which fall under strategy, financial and operating risks.

“In the last seven years we have doubled the assets and the people in the team, so we have some catching up to do regarding data,” he says. “Data integrity effort was taking more time than inferencing from data and we want to flip that so data quality work takes up 20 per cent of the time and analysis takes up 80 per cent.”

In order to make sure the fund has the infrastructure it needs for the next five to 10 years it has been laying out processes: to reduce the number of systems and integrate them; cleaning data; and ensuring there is a single source of truth.

“The key thing is the consistency and availability of data on a timely basis,” he says. “Portfolio managers need this at their fingertips, not to have to search for it. It will make a real difference in the next five years and will be an edge for them. We’re aiming to have clean, mapped data across the entire portfolio. As we get more complex it’s becoming necessary.”

The key focus for strategy risk is to ensure that as an organisation it is aligned with its mandate.

The sovereign wealth fund has a simple mission: to invest the funds that have been entrusted to it, in perpetuity. It has two purposes now, to provide a dividend to the Alaskan people and to help fund budget deficits.

“The permanency of the capital and generating a return are the cornerstones. And we need to look at risk management from this strategic component,” Vadakumcherry says.
Of course this includes the asset allocation and Vadakumcherry says a review is important.

“There are changes in the environment that mean we may need to tweak. For example there are disruptive technologies with a shorter cycle than our five-year asset allocation review,” he says.

New and disruptive technologies are one of the macro levers the fund is concerned about, and Vadakumcherry worries about the “risks of continuing with an asset allocation that needs review/tweaking”.

“We are asking what we need to change, for example because of low interest rates, or investments in private equity in new technology, and how does that impact other investments.”

 

Asset allocation

As CIO, Frampton is feeling cautious.

“It is common to point out how late we are in the cycle and I definitely feel that way,” he says.

While the fund’s consultant, Callan Associates has a 10-year return forecast of 7 per cent for the fund, Frampton is more careful.

He points to the Shiller PE multiple – which currently sits at around 30, an equivalent to Black Tuesday but still high in historical terms – and other indicators and says that the return could be more like 2 per cent.

“My outlook is for lower returns. The most common reaction to that is to increase the allocation to riskier assets but a more sensible approach is to do the opposite and take less risk.”

In particular, he points to volatility and believes the markets are only a year or two away from producing returns that vary from +8 per cent to -50 per cent.

When Frampton moved in to the CIO role in September 2018, he was previously head of real assets and absolute returns at the fund, the allocation to cash was $300 million. That figure is now $2.5 billion, with most of it coming out of equities.

“We didn’t have great discipline around rebalancing and were about 6 per cent over in equities. We now have no tolerance to be overweight equities and are sitting at 37.5 per cent against a target of 37 per cent.”

The current allocation is slightly overweight hedge funds, in particular market-neutral strategies which Frampton says “should have a shot at making money in down markets”.

The most significant underweight is in real estate with an allocation of 6 per cent against a target of 11 per cent.

“We are much more conservatively positioned than a year ago, but it’s all at the margin. Sebastian and I are in the bearish camp on markets now.” Frampton says. “I don’t know what will trigger a correction but the ultra-accommodative stance of global Central Banks for such a prolonged period almost guarantees that the inevitable next downturn in markets will be pronounced.”

The fund has been on a long-term plan to increase private markets to 36 per cent by 2021.

Private equity has increased from 3 per cent in 2012 to 13.6 per cent now. Similarly, the allocation to infrastructure and credit has increased from 3 to 8 per cent.

Each asset class will have 1 per cent added to it each year until 2021.

“I feel that it’s fast enough and won’t increase it further. The private markets allocations are all coming from equities. My view is we should definitely not decrease fixed income.”

Vadakumcherry is looking at where the hotspots are in the portfolio across different sectors and geographies.

He’s also keen to look at the role of fixed income, which at 20 per cent is a sizable allocation, and how that will be impacted.

“The role of fixed income is very important in the portfolio. It has a diversification role, but also at certain periods such as 2018, it has a role of return maximisation in a way.”

But he also points out that importantly it acts as a liquidity buffer.

“The most important role is an ‘opportunity capital’ role, as a provider of dry powder, it’s the potential it has to be redeployed and be a boost to long term returns.”

The fund’s growth, success and increasing portfolio complexity was the impetus for the creation of a separate risk function, and the way the CIO and CRO functions are working together is paying off.

“The separation of risk from the investment space is important. There is always continuous engagement and discussion between the teams, but it is important to have a separate function. There is more relevance now assigned to that function,” he says.

“We all have the same goal to maximise returns, and to invest you need to take risk. Our function is to make sure we understand the risks and they are in line with what we want to do.”

 

Demographic trends will have a profound impact on pension funds’ investment returns, argued Patrick Zweifel, chief economist at Pictet Asset Management speaking at the Fiduciary Investors’ Symposium at Harvard University. Ageing populations mean retirement ages need to rise and will see pension funds increase risk to stretch for returns. It could also see tougher economic conditions as increased longevity impacts on economic growth and falling saving rates could also lead to rises in interest rates, he told delegates.

World population growth has been slowing since its peak in the 1970s, said Zweifel. Population growth in Europe and America is slowing faster than Asia (also in decline but from a higher base) which will represent 60 per cent of the world’s population in the future. In another trend, the world’s age structure is changing with “less and less young people” in an accelerating phenomenum. The fertility rate is declining so that global population growth will be below “the replacement rate” by 2030, he said.

In contrast, improved healthcare means people are living much longer.

“The impact of a lower fertility rate and increased longevity will drive the share of the working population lower and effect growth,” he said.

It will also impact savings and investment, with an accompanying impact on interest rates which he forecast will rise, reversing the trend in falling rates, to counter the decline in savings in “many moving parts.”

Turning to China, Zweifel told delegates that despite China’s declining working population, employment has risen on account of China’s higher economic participation rate. Older people are working longer and there is an increased share of women in the workforce.

“If the right policies are implemented by governments, you can maintain productivity growth to offset the negatives of demographic transitions,” he said. Governments are responding to the demographic transition with policies, but he said policies to support savings or boost productivity “are the hardest.”

Regarding productivity, governments can increase working years and push the retirement age higher. Alternatively, they can support the fertility rate. For example, France and Sweden actively support women in having more children. In another strategy, governments can boost the labour supply by favouring migration. However, migration flows are not constant with populism, he said.

“Populism has had an impact on migration.”

Zweifel said that on one hand the rising number of old people puts more pressure on savings. On the other, it could also encourage people to save more. If people know they are going to live longer, they may start to save more for retirement, he predicted, noting this could particularly be the case in Asia. A natural response to living longer is to increase savings, he said.

“Households are rational and anticipate these things.”

Look no further than the economic travails of Italy and Japan to see the perils of Modern Monetary Theory, MMT, said Sonal Desai, CIO, fixed income at Franklin Templeton. Speaking at the Fiduciary Investors’ Symposium at Harvard University, she countered the arguments of Stephanie Kelton, a leading MMT scholar at Stony Brook University and senior economic advisor to presidential candidate, Senator Bernie Sanders who espoused the virtues of MMT in a previous session MMT: A solution to broken policy?

In contrast, Desai pointed to the lack of growth in both moribund economies as examples of how printing money doesn’t work. She argued that Italy “had something like MMT” going on before it joined the euro, whereby the Italian government was the buyer of last resort of Italian government debt. Elsewhere, Japan is currently labouring under debt levels of 240 per cent to GDP. Although neither country has runaway inflation, neither has any growth either, she argued. It means that “whatever these governments have done” hasn’t translated into “a higher quality of living” because the debt has run out over future generations. “Italy and Japan stand as cautionary tales; it is not something to emulate.”

Privilege

Printing money would test US institutions validity and robustness and would call into play the role of the dollar as the sole reserve currency. Sonal argued that being the world’s reserve currency is a privilege, not a right.

“You don’t choose to be the world reserve currency – the world chooses you.”

The notion that the US could print as much currency as it wants because it is the deepest and most liquid debt market in the world and there will always be demand, is not a given. The world has only chosen the US because of well-managed policy that includes sound fiscal and monetary management.

“If this goes by the wayside, it does mean you could have a different reserve currency.”

She flagged that history has witnessed many reserve currencies before the dollar arrived on the scene – and that the US tenure has been comparatively short. However, she dismissed the idea that China’s renminbi could replace the dollar anytime soon because China’s capital markets are not open.

“What defines a reserve currency?” she asked. “It means you can go to a village in Africa and pay in dollars. You can’t take the Chinese renminbi outside China. There is a long way to go before China assumes this role.”

Desai also argued that the idea that a country that prints its own money will never default is flawed. There are several ways governments can default, for example, due to rising inflation, resulting in a default, in effect, to its citizens who experience rising prices and “get back less.” Another way is via currency depreciation. US treasuries are held globally so that when the dollar depreciates this also translates into a version of debt default.

“US treasuries are the most liquid asset out there, and when there is a depreciation it is a version of debt default because you are getting back less than what you anticipated when it was issued.”

A licence to print money puts power in the hands of politicians, which carries perils in an era of populism. She said MMT was “incredibly seductive” for those on the both on the right and left, enabling them to offer tax cuts “ad infinitum” on one hand, or free education and green new deals on the other. She said MMT was “like a blank cheque given to politicians” at a time trust in politics is lacking. Going down this route would demand “strength and belief in institutions,” she warned.

Inflation

Desai told delegates that it was a “heroic assumption” to think inflation was “dead.” Indeed, issuing unlimited debt has powerful consequences for inflation.

“I have to tell you, I do care how many [Treasuries] are issued. We talk about inflation and the rise in goods’ prices, but there is also inflation of asset prices.”

She said that when asset price inflation increases it is not productive.

“If you triple the issuance of an asset, like supply of any goods or services, prices will crash and as owners of that asset that is worrying.”

She said that governments would be in the position of having raised all the revenue they needed, without doing anything to mitigate inflation.

“Spending trillions, and not one person concerned about inflation? You have to centre inflation risk in the budget process,” she concluded.

The International Centre for Pension Management, a research-based pension member-organisation with 42 partners from around the globe, held its 15th discussion forum in Australia last month.

One of the many unique benefits of the forum is an international working group made up of pension experts from Canada, UK, Chile, the Netherlands, South Africa and  the US, that critiques the system of the country where the forum is held. Last year that was Chile, the year before in The Netherlands.

Run by Rob Bauer, professor of finance at Maastricht, in conjunction with the Rotman School of Management at the University of Toronto the network began in 2005 as the brainchild of Keith Ambachtsheer. It aims to improve pension system design and investment decision making through research, discussion and collaboration.

In Australia, the key message of the critique presented by chair of the working group, Andre Snellen, entitled From MySuper to MyRetirement, was that Australia needs to wake up to the fact the system is a giant bank account with so much complexity that individuals are disempowered.

“This is our main message: Pretending people can choose in such a complex situation is fake, even misleading. People are utterly lost going into retirement,” he said.

“You know the words, it’s all there,” he told the audience, “it’s not the technicalities that are the problem. It’s wrapping your head around going from accumulation to decumulation, from a returns-based system to a replacement rate, from savings to an income stream. This is a very large pot, but there’s only a very small income system, that is what it is all about. You have to set the goal – from MySuper to MyRetirement. Members are happy in Australia because the system never promised anything. You won’t get around it. You have to set a goal. The system is there for a purpose and it’s not just saving. You have to move to MyRetirement. You have to set a goal.”

An (economic) psychologist by training Snellen, who is employer chair of the Dutch pension fund Pensioenfonds Detailhandel, described the Australian system as an adolescent with growing pains.

“When looking from the outside I’d say the super industry is in puberty or adolescence,” the Dutchman said.

“You had a baby at 3 per cent in the 1990s then a toddler at 9 per cent compulsory for all employees moving to 12 per cent. And now its at adolescence with 135 per cent of GDP. Very good, very well done. It has the potential to be a splendid human being. But as an adolescent if you hang out with the wrong friends it can go horribly wrong,” he said.

“You need to ask the existential question who am I? The Royal Commission and the Productivity Commission acted like parents guiding you and telling you what direction to go in, and it really rocked the boat. All these issues are on the radar, there is a lot to be solved. But that’s not the problem we see. Going from accumulation to decumulation – everyone sees it and says it but what does it mean – that’s the real growing pain.”

Fernando Larrain, chief executive of the Associacion de AFP in Chile who also sits on the ICPM board, spoke about his experience at last year’s ICPM meeting where the Chilean system was critiqued.

“We didn’t ask ourselves why pension funds were created. For many years we thought the purpose was savings. Now we have a big issue with the Chilean people to do with trust. People think we haven’t delivered what we promised. You have to ask what the real purpose is,” he told the audience. “Does it make any sense to have a for profit super fund in a social security system? There is a need to think about the system from a holistic view. If you don’t raise awareness now then in 10 years you will be discussing the building blocks like we are in Chile and you don’t want to have that conversation. Like Australia, the Chilean system is too big to fail. But the big role of pension funds at the end of the day is about paying pensions not about investment.”

Snellen pointed out the extreme complexity in the Australian system and the interaction between the means-tested state pension, health care, aged care, superannuation and home ownership.

“Politics is extremely divided in Australia, and maybe politicians should not set the goal. But if not them who should set it?” he asked.

Several people in the audience said the trustees should set it. But the working group saw a problem with that as trustees only manage the super system and do not look at or manage health care and other related systems.

“They lack a stable policy framework,” he says. “We feel trustees should not want that responsibility. If the political parties can’t do it, and trustees shouldn’t then there is a risk of the regulator becoming an implicit and unintended dealmaker, firefighting on the edges.”

The working group also criticised superannuation funds for marketing to 40-year olds.

“They focus on the 40-year old in their marketing, but they shouldn’t be focusing on them. In Australia retirees are considered to be customers leaving the shop, and not seen as the essence of the system. But that is what it’s all about, the focus of what you do. Why are you focused on 40-year olds?”

Snellen encouraged Australian super funds to give retirees a seat at the trustee board.

“This is a blind spot for you. A larger part of the AUM will be in the hands of the retirees.”

He also warned that risk management in decumulation is really different to accumulation.

“It is not going to be easy,” Snellen said.

“The fact the super system is 135  per cent of GDP and growing, is a serious pot of money, could seriously harm Australia if you do it wrong. I hope that makes politicians a bit more sensitive to what they should do in setting the goal.”

He saw the Retirement Income Review as a crystallisation   point but questioned the fact that treasury was running the review.

“In other countries you would have welfare or social affairs in there as well. Australia should look at this composition.”

He urged Australia to learn from other countries and suggested a “pension board” that would assess the optimal goal setting. This would include employees, employers, retirees and industry experts. He encouraged it to be separate from the political turmoil.

The working group also highlighted the need for Australian funds to have quality boards with expertise on IT, regulation and investments; and the huge amount of work needed on internalisation of investments regarding team structures and governance.

“In 10 years you would have bought everything in Australia,” he said.

In preparing for the critique, the working committee read all the recent reports relevant to the Australian market and also interviewed key stakeholders including Andrew Boal, Eva Scheerlinck , Hazel Bateman , Jeremy Cooper, Angela MacRae, Susan Thorp, Ian Yates, Helen Rowell, Nick Sherry, and David Knox.

In terms of pension systems globally, Australia ranked third in this year’s Melbourne Mercer Pension Index behind the Netherlands and Denmark. The index is a weight of scores on adequacy, sustainability and integrity.

It ranked 11th in adequacy with Ireland, France and the Netherlands taking out the top spot; it ranked third in sustainability behind Denmark and the Netherlands; and ranked fifth in integrity with Finland, Norway and the Netherlands making up the top three.

Knox who is partner at Mercer and author of the index said there were some obvious steps Australia could make to get an A-grade score and improve to the level of the Netherlands or Denmark.

“The first thing we could do is introduce requirements to have income stream products. We don’t have any requirement in Australia. There is a very strong assets test, in my view the means test is too strong. We need to increase the contribution rate to 12 per cent. Also on member statements we have no projections of future income, that would be helpful to frame the whole debate to be about retirement income. If we did all that it would improve the score by 3.7 and nearly get us to A grade.”

He also mentioned increasing the level of assets to 150 per cent of GDP, working a bit longer, and reduce household debt and increase savings.

“Is there an ideal system?” Knox asked. “There are countries with a small first pillar and a large second pillar, and countries with the other way. All have the same problems with demographics, low interest rates and lower returns. And all have system related problems. Then there are problems related to the maturity of the system,” Knox said. “You can agree on the goals of the systems, but all countries have arguments about the building blocks due to history, and politics, it’s why all pension system problems are local problems.”

 

Is private equity investment in the energy sector dead? No – but the game has changed and to be successful, investors should adopt a new commitment strategy. While the industry faces secular challenges, managers can innovate to exploit disruption and generate attractive absolute returns.

Private equity energy has quickly gone from a growth driver to investment pariah. Throughout the 2000s and into the 2010s, persistently high commodity prices, an abundance of fragmented assets, and a strong appetite for drilling inventory helped managers achieve attractive return multiples and internal rates of return — both with low correlation to commodity prices — and proved to be a popular addition to private equity portfolios.

The prevalent strategy was the equity line of credit (ELOC). A PE energy general partner using an ELOC strategy provides third-party management teams with a committed line of equity and a multi-year time horizon to acquire and consolidate assets. Managers commit to 30–40 teams and pay the teams’ expenses while they go hunting.

ELOCs raised successive funds quickly, since thresholds for raising the next fund were based on committed rather than invested capital, and sponsors satisfied strong limited partner (LP) demand by raising larger funds. Larger funds, however, generated more fees and necessitated bigger commitments, causing cracks in alignment as sponsors became focused on fees rather than carry. This misalignment took its toll on returns, with Cambridge Associate’s PE energy benchmark returning only 11.9 per cent by the end of 2013, versus 15.8 per cent for broad PE funds, on a trailing five-year basis.

The bottom fell out in 2014 as oil prices crashed. The industry radically altered its focus away from asset accumulation and toward free cash flow. This shift effectively ended the “land grab” phase of the sector’s renaissance.

PE energy was hit hard. With competition substantially increasing, it had already become harder to find directly sourced assets, making it difficult for ELOCs to invest funds in a timely manner. Increasingly efficient pricing of land, plus the increased deployment time (and associated “J-curve” impact, as overhead expenses accumulated), have challenged ELOC managers to hit return targets and have left LPs with huge unfunded exposure as ELOCs struggle to enter into and exit deals. Further, the capital markets access needed to make larger deals happen (such as those concerning debt and initial public offerings) has made PE energy more correlated with commodity prices.
The combined result is that the ELOC strategy is outdated. So, does that mean PE energy is dead? No, but success will require a new playbook.

The new playbook borrows from the techniques of traditional buyout managers in other PE sectors. Buyout energy funds are smaller and more concentrated than ELOCs, and energy buyout managers lead all facets of the investment process in-house.

This provides a crucial competitive advantage across sourcing, diligence, and execution. Buyout managers have a leg up because they are directly connected to the entire process. They are also better suited to complex deals than ELOC managers, who must go through several layers of decision making, which can hamper investment execution. Value-focused managers need to accept some complexity, which is also crucial to capital deployment in such a disrupted market. Faster deployment and the lack of overhead expenses are both accretive to net returns. Finally, and most crucially, buyout managers’ smaller deal sizes are easier to eventually exit, since exploration and production firms can fund small purchases from free cash flow.

What’s the rub? These strategies are not as scalable as ELOCs, which limits fund size, so access can be a challenge if you are not willing to commit to newer managers.

Another winning PE energy approach today is funding oilfield equipment and services (OFS) that are building a “better mousetrap” — mechanical or digital solutions that help drillers save money. Unlike classic OFS strategies that require a rising industry tide, these funds seek to steal market share from incumbents to grow, which is non-cyclical. During the downturn, managers taking this approach have typically shown strong growth and generated lucrative exits. While not for the faint of heart, OFS strategies may offer another way to achieve absolute returns at entry valuations starkly lower than the rest of the portfolio.

Rumors swirling about the death of PE energy are grossly exaggerated. With disruption comes opportunity, and managers that evolve to meet the industry’s changes should be well-positioned to succeed in the industry’s next chapter.

Michael Brand is managing director, real assets investment group at Cambridge Associates.

A big contributor to the long-term top decile performance of the Washington State Investment Board has been its high allocation to private markets. But it is not just the high allocation that sets the fund apart from its peers, it’s also the nature of the relationships with its GPs. Amanda White speaks to retiring CIO Gary Bruebaker about the fund’s secret sauce.

 

A big contributor to the top decile performance, over a 15-year period, by the Washington State Investment Board has been its high, and outperforming allocation to private markets.

Long-time chief investment officer of the $139 billion WSIB, Gary Bruebaker says it’s not too late for other institutional investors to go into private markets, but he has some very specific advice on how to make it work.

“It’s not too late for programs to increase private markets but if you’re just doing it by rolling the dice you’re wasting your time,” he says.

Bruebaker says the focus should be on investing to hire the best talent possible given the individual governance structure of an investor, and to focus on being a good partner to GPs.

“You can’t just hang out a shingle and invest with every GP that wants money, you’d be better off investing in public markets in a creative way. Investing in private markets requires commitment, loyalty, and time. New players can’t just buy the relationships that Oregon and Washington have built up over the past 40 years, but you can build the relationships to help find the alpha you need.”

WSIB has a 48 per cent allocation to private markets which has been built up since the 1980s. Bruebaker calls his joining with the pension fund 18 years ago a match made in heaven.

“My background was in private markets and it was a nice marriage given they also had a clear appreciation for private markets. We are overweight compared to our peers and most institutional investors at large, but that didn’t occur overnight.”

During Bruebaker’s reign, the private markets allocation has doubled. In terms of actual investments it has about 45 per cent of its assets in private markets: 22 per cent in private equity (against a 23 per cent target), 18 per cent in private real estate, and 5 per cent in tangibles (against a target of 7 per cent).

But it is not just the high allocation to private markets that sets the fund apart from its peers, it’s also the nature of the relationships with its GPs.

Private equity relies on long standing relationships and funds. It has 92 relationships, including some legacy funds, in that asset class. And in private real estate, where it employs 14 managers, an exclusivity defines the relationship.

“Real estate relies on direct relationships and we have control. It doesn’t look like anyone else’s RE program,” Bruebaker says.

“We invest in real estate operating companies. If you look from the outside it might look like everyone else’s, but when you drill down you see other states are LPs with 20 others and have limited governance rights, more like private equity. But if you drill down in our portfolio you find there is only one LP, it’s us. We can fire the GP without cause, and approve all acquisitions. And the performance is outstanding.”

Over a 10-year period, the private equity program has returned 14.7 per cent and real estate 10.7 per cent.

“It’s a big reason for our top decile performance overall,” Bruebaker says.

The commingled trust fund has returned 8.77 per cent since inception in 1992.

The relationship with managers is particularly unique in the real estate program. Not only does WSIB have very long relationships with managers, they are symbiotic.

“Anyone we go into business with, they make a lot of money. We say if we go into business with you, we’re your source of capital, you don’t need to find others, we are your capital. In exchange for that we ask that they put in every dime of their liquid net worth into the fund, we want them to have skin in the game. We say you can have no other business at all, 100 per cent of your time and attention will be on this, and it works out very well for us. We approve their budgets every year including salaries.”

In private equity WSIB importantly sits on the advisory committee of every fund it invests in.

“If we can’t get on the advisory committee over the long term, then we don’t invest,” he says.

“Of 40 relationships we have, we are on the advisory committee of all, we send the same person every time, we don’t want box checkers, we want people to go and add value. We say to them, only talk when you are adding value  – we don’t care how smart you are or look – and you should always be doing due diligence when you’re in front of a GP.”

Bruebaker is keen to harness the relationships with GPs and to be a preference client for them.

“We try to differentiate ourselves from other LPs. We want to show them what a valuable partner we are, because when they do something special we want to be called first, or as has happened be the only call they make. We want them to respect us, we don’t care if they like us, but we want them to respect us.”

Despite the high allocation to private markets, a recent CEM study found the total fee for Washington State portfolio is only 40 basis points.

“I’m an ex auditor, I started my career as a CPA, so expenses have always been fundamental to me. Alpha can be positive or negative but fees are always negative. It makes sense to me to save money money on fees,” he says.

“I’ve been doing this a for a really long time. In the 2000s market correction, fees were the only place we could make a difference, it reinforced what I always thought, fees are certain, alpha is not. But I have also been careful to manage fee negotiations because I want to be a good partner. I don’t want anyone to provide services to me and lose money doing it, it’s not sustainable. But I want them to make $100,000s after my members have made millions.”

Governance

Bruebaker gives a lot of credence to the governance of WSIB, and in particular the support of the trustee board.

“None of it would be possible without our board. They embrace the advantages of private assets and support us in being compensated for the risks we’re taking,” he says.

“Every organisation has to figure out what talent they can get and what they can pay them. In terms of governance it’s looking at how much authority the board will give you to make decisions, and if the board has turnover do they have discipline enough to stick by your long term view when things go bad.”

The fund undertakes an asset allocation process every four years. In 2008 there was 80 per cent turnover of the board, so there was a decision to go off cycle and carry out an asset allocation review after only two years and get the support of the new board.

“For a period of time in 2008 it didn’t look very good, we lost a lot of money. We did the asset allocation with the board and they didn’t change a single thing. We had constant communication and educational sessions so they could understand where we are going.”

Bruebaker says taking an inventory of the work environment and how the governance structure limits or enhances the investment choices is a good first step for investors in the journey to investing in private markets.

“For example we live in a bonus free environment, we are paid a salary and there are no bonuses no matter how well we do, because of that there are certain individuals we can’t get to work for us. Every structure has pros and cons, there is no ideal structure.”

The fund manages its fixed income exposures internally. One of the 17 funds the WSIB manages is a $15 billion insurance fund so an internal fixed income team was a necessity. It made sense for the retirement funds to take advantage of the cost savings by managing the fixed income exposures internally.

“They do a phenomenal job, they have constant outperformance,” he says. “I can’t pay the kind of salaries to attract the talent to manage private equity or even public equity internally so we outsource most of the management, but we don’t necessarily do it the same as everyone else.”

The real estate program is the biggest and has 12 internal investment officers dedicated to it.

“They are the most active. They’re not going to Vietnam and deciding to buy properties, and they’re not sourcing deals, but every major acquisition, is approved by them and they are approving business plans every year.”

When the fund recruits for staff, Bruebaker says it exercises the “three Gs”: green, grounded or grey.

“We look for people not long out of college, the green. People who are looking for experience and Washington sounds like an interesting place to work. For them we can say that within five years you’ll be doing things you won’t be doing at Goldman in 15 years. They get to make a difference and get very valuable experience. Occasionally we get fortunate enough to hire someone grounded. These might be people who have had experience and want to move back to Washington state to raise a family. They are grounded and there’s a reason for that. And then there’s the grey – people who have already made money and have an established career and they’re looking for the last chapter and want to work somewhere to make a difference,” he says. “At the end of the day if you want to make a difference to someone’s life, and build a solid career this is the place to be. If you want money then this is not the place to be, we pay very average public servant salaries. But we have hired several people away from endowments.”

WSIB paid $13.6 million in salaries in 2018.

Retirement

At the end of this year, after 18 years as CIO of Washington State, Bruebaker will retire.

“After 42 years in investments I still really like what I’m doing,” he says. But he’s motivated by spending time with his family and “being the best husband, father and grandfather I can be”.

In addition to the private markets focus, one of Bruebaker’s defining investment philosophies has been discipline.

“Discipline is easy for me, it’s the core of who I am. We have to have a long term view, because we are managing the financial future of 400,000 public employees who work very hard and expecting a decent retirement. We have to have the discipline to stick to that long-term view. If the world is really different this time, which usually it isn’t, or you get something wrong, you need to be able to see that and make some changes. But for the most part you need to be disciplined to stay the course. The first thing I think of when things are going against me is how can I double down,” he says.

“For me personally [discipline] is who I am, but what’s allowed me to do it is not because it’s in my DNA, it’s been a staff that believed in my direction and supported me and a board that has had the discipline when it wasn’t very fun to be us. Without that support I couldn’t have done it.”