New Zealand Super has appointed Matt Whineray chief executive, a role he’s been acting in since March.

Whineray joined the organisation 10 years ago as general manager of private markets; since 2014, he has been chief investment officer of the Guardians, the Crown entity charged with managing the investment of the NZ$38 billion NZ Super ($26.3 billion).

Whineray replaces Adrian Orr, the fund’s long-time chief executive who last year became the new governor of the Reserve Bank New Zealand.

NZ Super chair Catherine Savage says Whineray was the stand-out amid a high-quality field of international applicants.

“He has been instrumental in the Guardians’ successes over the last decade and is recognised globally as a leader in institutional investment,” Savage says. “The board has the utmost confidence in his leadership ability, intelligence and integrity.

“The board looks forward to seeing the NZ Super Fund continue to exemplify investment best practice and create value for taxpayers.”

In accepting the top role at NZ Super, Whineray thanked the board for its confidence in him and said he was delighted to take the leadership position.

“The NZ Super Fund is one of the most exciting places to work in institutional investment globally and I am looking forward to the challenge immensely,” Whineray says.

Whineray will take on his role in July. A new chief investment officer has not yet been announced.

NZ Super has most of its money invested internationally, with $30 billion in global markets and $5 billion in New Zealand across industries such as agriculture, farming, banking and aged care.

The fund’s one-year return was 20.7 per cent at the end of the 2017 financial year, with 4.37 per cent added above the passive reference portfolio benchmark. The fund’s 10-year return is 8.63 per cent and since inception it has returned 10.22 per cent.

For more stories on New Zealand Super click here 

I’m thrilled to be a part of the Aspen Institute Finance Leaders Fellowship class of 2018.

The Finance Leaders Fellowship seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry. The new, two-year program is modelled on the Aspen Institute’s Henry Crown Fellowship. Using the Aspen Institute method of text-based dialogue, and building upon the institute’s commitment to values-based, action-oriented leadership, the program will spur selected finance fellows to consider the values and perspectives necessary for effective, enlightened leadership in finance – and society at large.

My class is made up of finance leaders from across the globe in various sectors, including fintech, banking, asset management, debt and equity investing, commercial real estate, operational finance, pensions, endowments and regulation.

It’s a big thrill for me to be among these finance leaders trying to chart a more just, fair and prosperous future for the finance industry.

“We welcome our new fellows on this journey to becoming significant leaders in society through their roles in the finance industry,” Finance Leaders Fellowship managing director Jennifer Simpson said. “We hope to inspire them to leverage their platforms, their passions, and our growing community of fellows, to create a positive, lasting impact.”

The fellowship was co-founded in 2016 by Henry Crown Fellow Ranji Nagaswami, chief executive of Hirtle Callaghan, and Christopher Varelas, founding partner of Riverwood Capital, with founding sponsorship from the CFA Institute and other individual donors.

Our class will gather at four seminars over the course of two years to explore our own leadership, core values, desired legacies and vision for the global finance industry. Each of us will also commit to taking action by launching a leadership venture that will have a positive impact on the finance sector and society.

We also have the privilege of joining more than 2700 other entrepreneurial leaders from more than 50 countries as members of the Aspen Global Leadership Network (AGLN).

Others in the 2018 class of the Finance Leaders Fellowship are:

Andrew Marsh, President and chief executive, Richardson GMP, Toronto, Canada

Benjamin Gigot, Senior vice-president and head of research, Caisse de Dépôt et Placement du Québec, Montreal, Canada

Clay Grubb, Chief executive, Grubb Properties, Charlotte, North Carolina

Ellis Carr, President and chief executive, Capital Impact Partners, Arlington, Virginia

En Lee, Partner, head Asia-Pacific, LGT Impact, Singapore

Farah Foustok, Chief executive, Lazard Gulf, Dubai, UAE

Ibukunoluwa Oyedeji, Country head of securities, wealth and asset management, Nigeria, Ecobank, Lagos, Nigeria

Jen Easterly, Managing director, global head of the Cybersecurity Fusion Center, Morgan Stanley, New York, NY

Kofi Bruce, Vice-president, corporate controller, General Mills, Golden Valley, Minnesota

Michael Lindauer, Managing director, global co-head of private equity, Allianz Capital Partners, Munich, Germany

Neeti Bhalla Johnson, Executive vice-president and chief investment officer, Liberty Mutual Insurance Group; president and chief investment officer, Liberty Mutual Investments, Boston, Massachusetts

Paul Riseborough, Chief commercial officer, Metro Bank, London, UK

Rakhi Kumar, Senior managing director and head of ESG investments and asset stewardship, State Street Global Advisors, Boston, Massachusetts

Rob Krolik, Chief financial officer, board member and adviser, RK Consulting, Palo Alto, California

Rodrigo Gomez Alarcon, Managing partner, Capital Indigo, Mexico

Serena Tan, Executive director, Khazanah Nasional Berhad, Kuala Lumpur, Malaysia

Siobhan MacDermott, Global cybersecurity public policy executive, Bank of America, Washington, DC

Solita Marcelli, Managing director and global head of fixed income, currencies and commodities, JP Morgan Global Wealth Management, New York, NY

Sunny Sun, Chief growth officer, Yum China Holding Company, Shanghai, China

Thomas Liu, Chief operating officer, Vision Credit, Shanghai, China

Zion Baker, Chief financial officer, Head of finance division, Mercantile Discount Bank, Ramat Hasharon, Israel

For more information on the fellowships, click here.

In the 12 months that Russell Clarke has been chief investment officer of the $46 billion Victorian Funds Management Corporation (VFMC), he has been quietly getting on with it. In the last year, he and the team have undertaken a number of continuous improvement initiatives, including the creation of a centralised portfolio management group.

“When I joined VFMC, I was struck by how professional the organisation was; in particular, the team was very strong technically,” he says from the fund’s 101 Collins St office. Historically, the organisation has added much value at the asset class level, with infrastructure and non-traditional assets as particularly stellar performers. Infrastructure, for example, has added 9.2 per cent above the benchmark (CPI + 5 per cent) in the three years to June 2017.

“VFMC was a good example of very strong teams at the asset-class level, and they did a good job of adding value at the asset-class level. Credit to [former CIO] Justin Pascoe and the team,” Clarke says.

But in observing how the portfolio was managed, and the structure of the investment team, what struck Clarke was that the organisation would benefit from a whole-of-portfolio approach.

He points out that some functions, such as trading, previously reported to the CIO, but other functions, like asset allocation, didn’t. A restructure started nine months ago.

“We needed to think about things more holistically,” he says. “We recognised that and adopted a more whole-of-portfolio mantra.”

The centralised portfolio management group was created and Paul Murray, formerly head of fixed income and absolute returns, was promoted to head that. Nick Tribe has taken Murray’s old job. The portfolio management group covers all the functions that have an impact on the whole portfolio, including implementation, environmental, social and governance (ESG) concerns, strategic asset allocation and dynamic asset allocation, trading and investment risk.

Each asset-class team interacts with the portfolio management group, putting forward ideas, and is still responsible for manager selection. The fund has 85 manager relationships.

“Manager selection still resides in the asset class teams, and this is working well and I see no reason to change,” Clarke says.

While other Australian investors that have undergone recent organisational redesigns – notably TCorp and HESTA – have used Roger Urwin and the Willis Towers Watson team, Clarke and VFMC have gone it alone.

“We have done this organically, ourselves,” he says. “We have a lot of good expertise internally, and I am happy we could do that.”

Broad perspective

Before joining VFMC, Clarke spent 15 years managing assets at Mercer, culminating with his position as global CIO for mainstream assets and Mercer CIO, Pacific, responsible for investing $185 billion in assets for more than 200 funds. That role, and his previous experience as a consultant, gave him a broad perspective.

“I saw how clients were doing things differently and in those roles you also have to look at the total portfolio perspective,” he says. “My background was helpful in how to think about a portfolio, all it’s moving parts and how it fits together.”

In addition to creating a management group to look across the portfolio, Clarke has made the ESG focus holistic, too, refreshing the policy and making it an investment-led function embedded within the investment team.

“We now have a specific implementation roadmap for ESG, and are lifting our level of engagement with managers,” he explains. “We are not being prescriptive with managers but recognising [ESG is] an area of significant risk and opportunity and asking our managers what they are doing about it. We now have views and ratings of managers in that area.”

VFMC has also reviewed how it reports ESG and exercises proxies, and is doing a carbon footprint across the portfolio. There are about 100 staff at VFMC, 45 in investments, of whom about 15 are now in the portfolio management team. The team has been managing assets internally for about a decade, and roughly 30 per cent of the portfolio is handled in-house. There are no immediate plans to change this. Clarke says one of the by-products of the reorganisation is that he now has only four direct reports. Under the previous structure, he had eight.

12-step plan

Another step Clarke was keen to take soon after he arrived was to have an offsite for the whole investment team.

“This was really a brainstorming exercise, to improve everything we do,” he recalls. “As a result, we came up with a list of around 12 continuous improvement projects, and some will lead to material changes.”

These projects fall into three broad groups: foundation items; portfolio resilience; and data analytics and risk. Foundation items include reviewing and refreshing the fund’s investment beliefs, including an uplift in the investment philosophy and liquidity budget. It also includes reviewing all benchmarks, including an assessment of the balance between absolute and relative returns and the most appropriate benchmarks for unlisted assets, hedge funds and private credit. The team is also creating an improved process for debating ideas, including a discussion around developing the right forums for this. Portfolio resilience projects relate to VFMC’s 2020 strategic plan; they include introducing more flexibility in asset allocation and focusing on better beta; for example, by diversifying asset exposures.

Overall defensive strategies are also being reviewed, looking at ways to make the portfolio more defensive without having to put in expensive hedges. Lastly, resilience initiatives include what has been labelled a “fire drill project”, in which the portfolio will be tested with hypothetical situations.

“For example, we’d test how we would respond if there was a heavy fall in equities markets, what decisions would need to be made and who would need to be involved,” Clarke says.

In data and analytics, the fund has projects in train to improve risk analytics. In particular, it is looking at how to disaggregate risks appropriately, and feed them into the investment process to make better decisions. This means spending money on technology. There is a major IT project under way across the organisation.

“We have a strategic partner helping us scope out what we need and to select providers,” Clarke says. “This is a multiyear exercise and has a significant commitment from the organisation in time and budget.”

The team is also producing a whole-of-portfolio dashboard that is nearly complete. This combines data on performance, risk, asset allocation and manager allocation.

“It is a management tool for me but also, importantly, a great way to share information with the team and organisation to raise awareness of how we are travelling and also cement the focus on the whole of portfolio,” Clarke explains. “Cross-asset teams have been formed to work on all of these projects. It’s a different intellectual challenge that people are enjoying.” 

Down to flexibility

Clarke reports to chief executive Lisa Gray, who joined VFMC in January 2016. He is also chair of the risk allocation committee, which meets every two weeks or whenever needed. There is no investment committee in the organisation.

“We have a very good board that has a clear set of delegations that has allowed the investment team to get on with it,” Clarke says.

This structure allows the investment team to be responsive to market dynamics, and it can invest up to $1 billion without approval. Anything significant, such as strategic asset allocation changes, the addition of an asset class or investments over $1 billion will go to the board. VFMC has a core group of big clients. Its five largest represent 92 per cent of the fund’s assets under management and the investment team has a close relationship and meaningful dialogue with them. The other 25 or so clients are in a multistrategy portfolio, and are relatively low maintenance, Clarke says.

At the end of June 2017, the asset allocation of VFMC’s portfolio was international equities (33.9 per cent), Australian equities (19.2 per cent), diversified fixed income (10 per cent), inflation-linked bonds (9.8 per cent), property (7.7 per cent), infrastructure (6.1 per cent) private equity (0.5 per cent), non-traditional strategies (10.6 per cent) and cash (2.2 per cent). But Clarke says asset allocation changes are coming. While VFMC has been good at managing individual asset classes, he says the next step is to balance total portfolio construction, too.

“What we really want to do is pull all the elements together and have an evolving overall asset mix over time in a thoughtful way,” he says.

Obvious areas for change include fixed income and credit. The fund has historically focused on domestic bonds and has had no global credit or sovereign debt exposures. “Now is not necessarily the time to go into those assets but they are a key defensive lever and we want it in the tool kit,” Clarke says.

VFMC was also an early investor in private credit, which was an opportunistic allocation. Clarke is now looking to add it as a base exposure instead. Ultimately, Clarke sees flexibility as the key challenge. VFMC has a two-pronged approach to asset allocation, with strategic asset allocation covering a 20-year timeframe and dynamic asset allocation over 12 months. Now it is looking to incorporate a process that allows for an evolving asset mix and a cycle-aware approach to allocating assets.

“There is a big gap there between strategic and dynamic asset allocation,” Clarke says. “We are looking at how we might evolve the overall asset mix over time and we may need to make strategic changes that aren’t necessarily 20-year changes. There may be points in the cycle in five to 10 years’ time when we will have to evolve the portfolio.

“We want to have a governance structure to be able to do that.”

A story we published  on hedge fund portfolios questions whether they are worth it for large institutional investors. Analysis of more than 400 institutional investors’ hedge fund portfolios showed they do not deliver on their promise of added return or risk mitigation and could be replicated at much lower cost by simple debt/equity blends, the research by CEM Benchmarking has found. Many hedge fund portfolios perform well before costs but fall into negative alpha due in large part to the hefty fees paid to service providers. 

Many leading funds, such as the $71.9 billion Massachusetts Pension Reserves Investment Management Board, have been addressing this issue of costs. Mass PRIM called in executives at one of its longest-serving and most skilful hedge fund managers for a chat. The pension fund’s analysis of all its active managers involves factor and return decomposition, in which performance is broken down to see if it is attributable to factors or other persistent biases or tilts. The Boston-based fund staunchly pays active management fees only when strategies show true skill and can’t be replicated or bought cheaper elsewhere. Alarm bells rang when the returns from the hedge fund in question tallied closely with returns gained through a two-year exposure to US Treasuries.

“The manager ran a long-short equity fund; it wasn’t being paid to buy bonds,” chief investment officer Michael Trotsky says with a wry laugh.

Meanwhile, Canada’s C$95 billion ($74 billion) AIMCo, already renowned for its willingness to experiment and an eclectic mix of assets that includes a Chilean utility and BBC Television Centre in London, is pushing innovation further. It’s taking ownership stakes in energy groups and hedge funds, using new technology to boost efficiency, and going after private equity with renewed gusto.

Across the Atlantic, AP3, the SEK345.2 billion ($42.2 billion) Third Swedish National Pension Fund, scaled back on hedge funds last year, and boosted its internal portfolio construction capabilities. It introducedvolatility risk premium back in 2010 and has since added other premia, such as value, quality, momentum and carry, all designed and run by external managers until recently. It has now internalised all construction of the risk-premia portfolio. Also in Europe, the sophisticated Danish ATP posted an annual return of 29.5 per cent, driven by its return-seeking portfolio, which makes up about one-seventh of the fund.

It has been run on a risk-parity basis since 2005, and ATP recently decided to replace the traditional asset classes it had invested in during the last 10 years with allocations based on equity, interest rates, inflation and other risk factors – namely illiquidity and an allocation to long/short hedge funds or alternative risk premia.

The hedge fund portfolios for nearly 400 large institutional investors do not deliver on their promises of added return or risk mitigation and could be replicated at much lower cost by simple debt/equity blends, research by CEM Benchmarking, the Canadian-based provider of independent cost and performance analysis, has found.

The analysis draws on 17 years (2000-16) of CEM hedge fund data from 382 investors, mostly pension funds but some buffer funds and sovereign wealth funds.

On average, the hedge fund portfolios of these funds performed poorly, due in large part to the hefty fees paid to service providers.

The analysis shows that, before costs, the hedge fund portfolios added 1.45 per cent, relative to a custom-made CEM equity/debt benchmark; however, because hedge fund costs are so significant, there was negative alpha after costs. Across all styles in the CEM database, costs in 2016 were 2.72 per cent; that included 2.2 per cent for direct investing and 3.26 per cent for fund of funds. This diminished the hedge fund portfolio value add to   –0.54 per cent for direct and –2.11 per cent for fund of funds.

One of the authors of the report, Alex Beath, senior research analyst at CEM, says it was important for CEM to construct a benchmark to measure the outperformance of the hedge fund portfolios. Funds used two types of benchmarks for hedge funds in 2016: cash-based indices and specialty hedge fund indices. Both are flawed, Beath says.

Cash-based benchmarks, such as Libor + 4 per cent, have a correlation with hedge fund returns of about 7 per cent, are not investable, and are easy to beat.

Similarly, specialty hedge fund benchmarks are flawed for a number of reasons, not the least of which is that they are based on self-reported hedge fund returns that are not investable, or synthetic hedge fund replication, which is easily outperformed.

In selecting benchmarks, Beath says, there are a number of principles that should be used, including that the benchmark should be investable.

“An investable benchmark is what you could have had, a real alternative that was possible, and ideally implementable at low cost,” he explains.

The benchmark should also have similar risks to the investment program and fairly reflect available returns.

“Benchmarks that are too easy or too hard to beat may give undue credit for investment skill, or not give credit where it is due,” Beath says. “If a benchmark says it should produce a certain return and you put that into your asset allocation model and it’s the wrong information, it could have big consequences.”

CEM created a simple debt/equity benchmark to improve and standardise performance comparisons.

It found, on a gross basis, about two-thirds of the funds’ portfolios outperformed. But when costs were considered, only one-third outperformed.

“We’re not saying hedge funds have no skill; before costs they do,” Beath says. “But it’s the costs! They’re not serving their clients. If costs do come down, it could be worth it, but the way returns and costs are being shared right now is not in the best interests of investors.”

The investor portfolios that were analysed showed a variety of exposures to hedge funds and managers and ranged from five mandates to 50.

“When funds are putting together their portfolios, our benchmark indicates the diversifying elements of each hedge fund are cancelled out,” Beath says. “The nuance of a particular strategy is cancelled out.”

CalPERS is looking to get creative about how it attracts and pays talent, as two key investment positions remain vacant.

Some suggestions include tying pay to funded status or to the fund’s contribution to the state of California.

The problem of attracting and retaining investment talent at CalPERS, where compensation lags industry peers, has come to the fore once again, as the largest pension fund in the US begins its search for a new chief investment officer and continues to seek a new head of private equity.

“We are a multibillion-dollar organisation with 2800 employees, we have a multimillion-dollar impact on the State of California and a global presence, and our compensation is just too low. We are not attracting quality candidates,” CalPERS board member Richard Costigan said, speaking during a recent meeting of the pension fund’s performance, compensation and talent management committee.

CalPERS will not pay top-quartile rates like some Canadian funds but, Costigan argued, pay needs to go up to reflect the transition the organisation is going through, its diverse portfolio and membership, and pressure from the state legislature.

“We are paying millions of fees to outside managers and we ought to be addressing that internally, too, because it does lead to cost control,” he said. “We need to empower our CEO to bring in the best kind of folks to meet our members objectives. Where we are now is not acceptable to me.”

[For an analysis of how leading Canadian fund, OTPP, pays its people click here)

Clock is ticking

The latest meeting offers aglimpse of the challenges of navigating remuneration policy at the giant pension fund. CalPERS’ compensation needs to be high enough to retain staff but not so high people join only for the compensation. Salaries must not give the wrong impression to beneficiaries or stakeholders; they can’t incentivise risk or take too much from precious investment capital, yet they need to be high enough to woo talent in one of the most highly paid industries in the world. Finding the goldilocks zone for CalPERS’ remuneration is proving difficult.

And time is of the essence. One year on, and the pension fund is still looking to replace its head of private equity since Réal Desrochers left, picked off by an overseas bank.

Sarah Corr stepped up to become the interim head of the vast program, which dates from the early 1990s, accounts for 8 per cent of assets under management, and is also the fund’s highest returning asset class, with a 10.6 per cent annual return over the last 20 years.

Despite the urgency, the board continues tothrash out its pay parameters– what it should pay relative to peers, who those peers are and, most crucially, whether setting pay at mid-market levels will allow the pension fund to find the people it needs.

Grappling with the essentials leaves little room to weave in other ideas, such as tying compensation to the funded status of the plan in an approach board member Dana Hollinger suggested in the committee meeting.

CalPERS is particularly vulnerable to losing investment staff to local university endowments, where pay is higher than at public-sector pension funds, despite lower assets under management and less job complexity.

“The chancellor of the University of California, Los Angeles made $420,480 last year and the chancellor of UCSF (University of California, San Francisco) made $819,545, not including other incentives,” Costigan noted.

In comparison, departing CIO Ted Eliopoulos was paid a base salary of $552,842 in 2017 and awarded a $314,335 bonus, public pay database Transparent California shows. CalPERS has a base range salary for its CIOs of $408,000 and $612,000.

During the board’s discussion, it called in expertise from Andrew Junkin, president of Wilshire Associates. Drawing on compensation data from 107 CIOs, taken four years ago, Junkin told the panel that the top third of the sample were, indeed, paid “a million bucks year”.

“You are going to have to pay for talent,” he said. “The top third is a reasonable group to compare against.”

One way to engender more support for salary increases from CalPERS stakeholders could be making much more of CalPERS’ economic contribution to California, Costigan suggested. About $21 billion in annual benefit payments helps fuel economic activity across the Golden State.

“CalPERS generated $9.6 billion in Californian activity last year, including $2.2 billion in Los Angeles and $2 billion in Sacramento,” Costigan said.

It led to another bone of contention on the panel: quality candidates who want to come to CalPERS are affected negatively not only by the salary level, but also by harsh federal tax policies.

Eliopoulos, who has been at CalPERS since 2007, will remain in the job until a new CIO is named and assist in the transition. He is moving to New York City to be closer to his family.

Key changes introduced during his tenure include reducing the complexity of the portfolio, halving the number of managers to 150 and ending the hedge fund program.

Eliopoulos has also overseen moving more assets in-house, with 70 per cent of the $350 billion fund’s assets now internally managed by a team of nearly 400.

The fact that pressure on investment returns has ratcheted up, with CalPERS now paying out more in contributions than it takes in, adds a new urgency to attracting and retaining talent.