The New Mexico Educational Retirement Board’s aggressive move into alternatives has not been without hurdles. Chief investment officer, Bob Jacksha, spoke to Amanda White about the plan’s alternatives strategy, the bumps along the road and his expectations of the sector.
Two years ago the $6.6 billion New Mexico Educational Retirement Board started looking for a chief investment officer with specific alternatives experience. The aim was that the CIO could bring relationships and also overall analysis and understanding of the asset class to the table.
Bob Jacksha, who has 25 years investment experience, most recently as deputy CIO of the New Mexico State Investment Council, has an MBA and holds a Chartered Financial Analyst and Chartered Alternative Investment Analyst designations, had the right qualifications.
Since Jacksha’s hire, the New Mexico Educational Retirement Board has been transitioning to a new asset allocation which will decrease its equities exposure from 65 to 45 per cent, and double alternatives to an overall allocation of 30 per cent.
“We increased alternatives from 15 to 30 per cent, doubling hedge fund and private equity allocations, with allocations coming out of equities and fixed interest,” Jacksha says.
That new allocation will be split 10 per cent hedge funds, 10 per cent private equity, 5 per cent real estate and 5 per cent real assets, including infrastructure, timber, and agriculture. An allocation to commodities was discussed but it was decided not to allocate at the time.
Jacksha oversees four investment professionals (the fund also has two internal investment staff on the operations side) and while he would like to expand the internal team, that would require an act of legislature, and so seems unlikely.
NEPC, the fund’s general consultant, has shown the asset allocation in the past quarter has contributed a positive 2 per cent to the fund’s returns, while manager impact has been -4.8 per cent.
Investments have been trickling in to meet the allocations, with a recent $25 million allocation in ORG Real Property’s secondary fund fulfilling the plan’s target allocation for real estate. A chunk of that allocation is in an internally managed REIT index fund and over time, Jacksha says, that allocation will be transferred into private real estate.
Some infrastructure and private equity commitments have already been made, and that will be ongoing, with Jacksha predicting a good environment for private equity deals.
“In the past few years the market for deals has been good, endowments have been selling and there are opportunities in the secondary market,” he says. “For the first time in many years private equity firms are going out and having to market their funds.”
The ERB has $745 million in private equity commitments in 25 different funds, which have a market value of $162 million.
In the time since the new asset allocation was made, the ERB has seen some dramatic turns which have somewhat derailed the initial investment strategy.
“In the past year, hedge funds didn’t do what we wanted them to do – they didn’t give much protection on the downside,” Jacksha says.
For the year to December 2008, none of the alternatives investments contributed much to the fund. In that time the absolute return composite delivered -23 per cent to the fund (the most dramatic return being the -28 per cent contributed by the Gottex Market Neutral fund), the private equity composite returned -13.3 per cent and the real estate assets returned a damaging -30.6 per cent.
And while not having a huge adverse effect on the investment outcome, because the allocation was small, the controversy over an exposure to one of Madoff’s investment funds, was also an unwelcome distraction.
In a statement the ERB said: “As part of our overall investment plan, ERB allocated approximately 10 per cent of our assets to hedge funds. One of our hedge fund managers has an investment in a fund managed by Bernard Madoff. As the press has widely reported, Mr. Madoff is alleged to have committed fraud in the management of several hedge funds. While the ultimate outcome of this investment is unclear at this time, we do know that our maximum possible exposure is $9.75 million. Although this is not an insignificant amount, it represents only 0.15 per cent of our total fund balance. Regardless of the outcome, it will not affect the payment of retiree benefits. It will not have an impact on the stability of the fund. We are examining all of our options in this matter with an eye toward maximising our return of capital on this investment.”
Jacksha has faced his fair share of controversy during his tenure at the fund, and most of it has been in the alternatives space. As recently as last week, the investment committee decided to suspend its private equity consultant, Aldus Equity, following the indictment of former New York state comptroller executives over claims of receiving kickbacks from an Aldus fund and other investments.
Aldus is also private equity adviser to the $14.1 billion New Mexico State Investment Council, which has put about $350 million in private equity funds.
The Dallas-based Aldus Equity has been paid $905,000 a year for advisory work for the State Investment Council and $750,000 a year for work for the ERB. While it is unclear what the Investment Council will do regarding its private equity advice, the New Mexico ERB has decided its general consultant, NEPC, will widen its scope to include private equity until a decision is made whether to replace Aldus permanently. Its other specialist consultants are ORG for real estate and timber, and Corkland Partners for infrastructure.
These adverse experiences in the past couple of years have taught the fund not to be complacent when it comes to its alternatives investments.
In particular, Jacksha is adamant when it comes to fees paid for alternatives that transparency reigns. He has no problem with performance hurdles, and almost always agrees with those that are proposed by investment firms. However he believes management fees could be a bit lower.
“Fee sharing, or fees from deals, should not exist,” he says passionately. “It is a perverse incentive to do deals.”
The New Mexico Educational Retirement Board returned -28.1 per cent for the year to December 2008.
Asset allocation (at December 31, 2008)
|Private equity||2.3 %|
|Real estate funds||1.6 %|
Board-approved asset allocation target
|Large cap equities||23%|
|Small cap equities||2%|
|International small cap||2%|