YouSaid · the spoken record

Chris Ailman

lines on the record: 101
first: 2019-02-11
most recent: 2019-02-11
sittings or episodes: 1
sources: podcast

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“Everybody collected on you. So this we don't want to just have something where we're losing or paying for insurance. We want to break even while we're there. But it really is designed not for an October like this year. It's designed for a bear market, for 0102, 7374. It might kick in in something like an 87, but even in 87, it was so fast and so short term. It really is designed to be for what we would consider traditional 20% bear market, but especially for the deep declines of the 30% and 40 percent, which should probably happen, like I said, about once every 70 years.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“back and said, you know, it'll cost you three hundred basis points on the return. Would have been a good move at the time had we known how bad it was going to be. But we've looked at all those kinds of strategies and put together right now four strategies that we're constantly looking at more. And particularly in this day and age, when you look at the market that declines while normally there was a flight to the dollar and a flight to the 30-year bond, it's interesting that around the world you're starting to see a flight sometimes to yen, other places as a safe haven, and we're going to keep researching that and looking at that. I often say to the board, think of our risk mitigating. When you have those, what I call left-hand tail risks in life, your car, your life, your fire insurance, your home, you buy insurance and you're happy to write that premium check. I often joke, you know, you're actually happy to write your life insurance premium check because the option is.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“of insurance or move away, but you do pay attention to that risk and try and find ways to balance it. So we spent a lot of time studying different strategies, realized there, of course, isn't one silver bullet to take for a pension plan that will solve that problem. But when you look at our fixed income at about 12 and then risk mitigating at about 9, we're back to about a 20% level of what I would call diversifying assets. And when we looked into that bucket, we really looked at it comes down to trading strategies because you're trying to find opportunities that will shift away from equities and will cut their losses quickly. We looked at catastrophe bonds. We looked at options under options writing. A number of different strategies. I remember in 07 being called into the Department of Finance to ask myself and the counterpart of CalPurs to price out buying puts for the entire portfolio.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Actually, started all the way back in 2012. The board had one of the goals that we did for the investment committee was to look at alternative strategies. And it was a recognition back then that interest rates were gliding toward zero. Who knew they would go through zero? But interest rates were in a constant decline. We were consistently lowering our exposure to fixed income. We had gone from twenty percent, 25% to 20% down to 15, and then now the new target of only 12. And we knew we needed diversification in the plan, especially after 08. So we spent a lot of time really studying 2008. We thought it was a 1.5% likely occurrence and realized that, you know what, in this day and age, it's probably closer to a 4% occurrence. And for the listeners, that's in essence instead of a 100-year flood, we realized it's a 60 or 70 year flood. So you don't run out and slap a bunch of...”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“True. And that's part of the debate that we have. That's why I bring those groups together at the senior level to talk about what are we doing in fixed income. Fixed income can also build a lot of credit risk into the portfolio and suddenly look like an equity like I've got some peers I know that are nearest that frankly take tons of equity risk in their fixed income portfolio. And when you get volatility in the equity market, it hurts. I want it to be an anchor to winward. So when we're concerned about risk in the portfolio, my fixed income team is dialing down the credit exposure and the credit level in the portfolio. And so that's part of that active debate is actually them working together. It's not uncommon to see actually our inflation sensitive head down in the fixed income group for their morning talk just to keep gauging that market and what's going on.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“When it takes that long to move, you've got 2% today in inflation sensitive moving towards 4%. You've got 12% in fixed income. And depending on the character of that, Those could offset each other just in and of themselves”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“out the entire portfolio when they were at negative yields and went to the board and said it's just doesn't make sense to be there yet, but we are now building it up. Obviously the Fed's approaching and passing that 2% goal for inflation, that's still incredibly low. And so we're just building that portfolio over time and that'll be an active debate in the next asset allocation, as I say.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“The board picks a spot on the horizon. The challenge is we actually never ever reach it. We're constantly out in the ocean sailing. But our job as the staff is to decide whether it's full speed ahead because it's smooth sailing, winds at our back, or whether we need to batten down the hatches. And so they've picked a long-term target of 4% in inflation sensitive, but we came back and said, you know, inflation is just not on the horizon. And the Fed's struggling to get it to 2%. In fact, at one point, we ramped up to where we had a full two percent all in tips. And within the board's long-term goals, we have a tactical group within the investment office that meets quarterly to talk about risk on risk off, and then a much smaller group that talks about risk. And we meet actually monthly, sometimes ad hoc, weekly. And it was one of those meetings that one of the other staff in other asset class said, you know, if tips are negative, why don't we sell them? Why do we have them at all? And we did.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“It starts with a discussion with the board. So they set a long-term asset allocation target on what I like to describe as listeners. Think of a big pension plan like ours as a giant cruise ship. I like to think of that because it's a happier vision.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“And in that type of situation where you want to put it to work thoughtfully, but there are proxies you could do with the internal team to get it at four and then talk about it. How do you decide while we're at two today, we like how we're doing it? We could quickly get it to four. It might not be optimal. Or we're just going to do it piece by piece.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Right now, the target for that is 4%. We're only at 2. And I've said to the board, 4% frankly isn't going to move the needle. That's one of the challenges at our size, which is having to put a huge amount of money to work to actually make an impact. That'll be a debate coming up in our asset allocation study in 2019 is how much should that inflation component be?”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Mixture because you recognize we've studied it for a number of years, there's not any constant driver of what creates an inflation boom. And we look back, it could be cost, push or wage pull. But it could also come from other areas in the commodity space particularly. So it's a basket of tips which are internally managed, makes sense, fixed income instrument. We've got a desk. But we look at anything that has some correlation to inflation. So we've done some commodities. There we've done some commodity swaps. So we internally manage the other side of the swap, the collateral side. But externally, we've got timber. We have some infrastructure, which we recognize isn't totally correlated, but should over time, if we had a prolonged inflation turf, have some correlation. We've looked at farmland as an option of adding that in. Things that just aren't as correlated to typical stocks but have some inflation. We know at the beginning of an inflation regime, it's actually good for global equity, and it will do well. But what worried about is that value erosion over a long broad time period.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Right now, we're about 54% global equity and we are truly global, so about 50-50 US and non-US. We've got probably 12% right now in fixed income, and that's mostly domestic, but we've got a little bit of universal global fixed income. 12% in real estate, 8% in private equity, 9% in a new asset class called risk mitigating strategies, which is an asset class most people haven't heard of before, but it really was an effort to look at what can we do to drive. Lose less money in a down market and to definitely protect and actually probably make a little bit of money in an 08 or a 7374 kind of a market. And then we've got a growing portfolio of inflation sensitive assets because we're concerned at some point inflation is going to come back and be a problem.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Challenges, it's a really long term investment. We think we should get an illiquidity premium for doing a 10, 15, 20 year investment, but there are going to be regimes like this last 10 years where it's pretty hard to beat anything in the U.S. public equity market.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Argued about indexing a little bit. So it's an interesting challenge. Fixed income, we're an enhanced index. Nobody truly indexes fixed income, but we're fairly close to the index. We use external management where we think it can pay for itself and add value. And that's where the struggle has been. As we all know, active management is really challenged in this last decade because of the strength of the market, mostly the Federal Reserve easing just created a risk on trade. So for us, we're constantly having that debate about where is the value. I only want to get a net return above the cost. And sure enough, when you look at it, the cost is eaten up almost all of the alpha in active strategies. In what I call the diversifying strategies, when you think of real estate, private equity, that's got to beat what is the alternative in the public markets. And we're constantly gauging it against that.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's also an house in most of it, is in house as well. There are clearly things we can do very efficiently in house with our staff. There are some things we can't do and we're not going to try to do it. But frankly, we can run money at one-tenth the cost of hiring somebody here on Wall Street to do the same thing. And indexing at our size is actually very inexpensive. But it really shows you that by having the internal capabilities, we've got scale. And I like to point out BlackRock, SSGA, State Street Global are great firms, but they have multiple clients. I've got an index team who only has one client and five indexes to pay attention to, and so they could be very sharp and very attentive. And sure enough, we're able to add a little bit of incremental value on top of that. Nine US equity in the developed markets were 50% indexed. In emerging markets, we're 100% active. That's where my staff actually is.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“We have had that discussion. We actually on a regular basis have that discussion because there's no reason to broadly diversify into alternative strategies or certainly even active management if it doesn't exceed what the index provides. And particularly in active management, large cap U.S. equities, we're constantly having that debate. I'm having that debate with my staff in non-US developed markets. We have a debate about how much is efficient and what's the inefficiency. Even in emerging markets, my staff wants to argue with me about the level of efficiency. So when you look at us, I would argue we actually are fairly passive. 70% of our U.S. equity is indexed. We run it in-house, but it's indexed. And even then, about another 15% of that is in what now is called smart beta. I like to call other beta because I don't want to think my first beta is dumb beta, but it's an alternative beta strategy. So not high trading volume, but also...”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“If I picked on a few of the things you've pointed out that are important, and that are pervasively accepted for your constituents, low cost, there's friction in making changes in the portfolio, you have a fair amount of internal management. It would be logical to say this is a huge pool of capital. It's a flawed business model. We should just index this.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“If you've worked with retail customers or small institutions, you realize you're a money manager, an asset manager. You meet the client's needs. What is your risk appetite? Where do you want to be? We can design a portfolio, understand the dynamics and the volatility you're inheriting, and you have to be comfortable with that.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sharps work, showing them the academic work behind it that gives them the basis for the theory and gets them comfortable. But that does create a challenge. We've had board members that just their risk appetite is fixed income. They want to be very conservative. They don't like taking risks. They don't like seeing the portfolio go up and down in value. And talking about the funding and it gets back to, okay, if you don't think you can earn that kind of rate of return, then you need to contribute more. There's only two flows into a retirement fund. Contributions and investment earnings. I have had other trustees who believe wholeheartedly in private markets and then others who don't believe in it at all. And that becomes an interesting challenge in a dialogue. I was at a fund where I would say they could not get enough private equity in real estate. Every transaction we brought them, they said not only yes, but double the amount of the investment.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“No, I think when you say most people, you're right, most people. But I have had some of those other people. I have had trustees who came in and said, you know, that's great, but I don't believe in modern portfolio theory. I'm absolutely convinced that we can pick the best 810 stocks and we don't need all this diversification. Basically, they're saying I think I can be like Warren Buffett. So we have to have a long dialogue. And, you know, what's important, and I think the hardest part for people to realize about our jobs as CIOs, we don't work for one single person. We work for a chorus of 12. And while you work with them individually, you have to listen to the chorus. You can't listen to 12 solos because you are not going to meet their needs. And I've realized in those circumstances it's talking to that member, getting to understand, taking them all the way back to Markowitz. Harry Markowitz is still alive, I'm proud to say, lives in San Diego, California, taking them all the way back to modern portfolio, Markowitz, bringing them up through Farmer French and Ill.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, as these political regimes change, what you laid out as core beliefs, pretty much anybody listening to this is going to say, oh yeah, that's common knowledge. How much pushback do you get from people who may not come from an investment background? But, well, those were the core beliefs of the Republicans, now Democrats are running the House.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“You might come from, I'll say an elected official or a member, you come in from a different area, but you have to take that hat off and put on the hat that you're a fiduciary for a trust fund, and you have to think about what's best for everyone in the trust fund, not just the taxpayers and the state, but the employers, the school districts, and the members. And consider that. And that's always a challenge for people.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Before you start taking charge of something, you kind of have to know where it came from. But that's going to be a big part of our discussion, which is getting them understand their legal framework, what's their fiduciary rule, what is the state constitution already mandate, which is to diversify the assets, keep the costs low, and it's for the exclusive benefit of the members. And that's probably the hardest thing to learn is that when you come into that room,”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, things like cos matter. Markets are generally highly efficient, but diversification is the best way to reduce risks. We believe that ESG is an important factor and needs to be put into investment decisions. We want alignment of financial interest with our money managers. We recognize that there's an illiquidity risk premium in long-term illiquid assets, and we believe in internal management that it can be efficient if run effectively. So within those core beliefs, you've then got an investment policy. I'm going to present that at a very high level. And I also actually provide them with a history paper that goes all the way back, the investment office at Calster's was only started in 1983. It was actually born out of CalPurs at the time, while Sturz has been around 107 years. The investment office is fairly new. So I want them to understand the history.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've actually been thinking a lot about that because with the midterms, that typically is when the states have their election cycle. And so for us, new governor, new treasurer, new superintendent of public instruction, about half of my board is going to turn over, and I will see new faces up there, at least five to six new faces out of twelve, in February. And what we're doing is taking them right back to square one, which is the board adopted a set of investment beliefs. So here are the eight things the board before you firmly believes in. Do you agree with those or do you need to change some of those? That helps give them stability.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“So let's turn to them investment side of the equation. You mentioned having a bunch of policies that the government's. In fact, a cursory look at your website, there's something like 20 different written policies for every asset class and strategy, everything you could conceive of. How do you start the process of communicating, say, with the board about the investment program?”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“How do we get their attention? How do we tell them what we're doing? When I go out and talk to young teachers, they frequently say, well, I know you take money out of my account and somebody up in Sacramento, somebody in government does something to it, and I want to say look, we've got a mini Wall Street up there. It's not just government. We look like anybody in New York. We look like a small version of BlackRock or anybody else. top-notch investment professionals. We run half the fund in-house, $110 billion, which would be a huge money manager anywhere else. And we have to triple their money while they contributed over time and grow it so that they can retire on it. And getting their attention on that is going to be a constant challenge.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“year old what we call the ski slope. Start saving now a little bit at compounds over time and look at how when it gets out there to 30, 40 years it just shoots up to a million dollars, but it is so hard to get them to start and to care. And I often say to people that come to me when they're 50 or 40 and say, hey, I want a safe for retirement. I'm like, hey, that's great. Should have started 30 years ago or 20 years ago. It's the time value money, that's the power. You're touching on an interesting challenge, which is the teachers care about specific issues.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“And it is so hard to get their attention to say you need to care about the next thirty or forty years. And the average forty-year-old teacher at least knows what the initials mean. The average fifty-year-old not only knows the initials, but probably even knows somebody on staff and has called in. And I can tell you the average 60-year-old knows somebody by name, can tell me the formula benefit, and knows everything about it. And that's just a reality the 401k market faces that too. How do you get that young worker to pay attention? One of my favorite ideas that somebody came up with is when they signed up for the 401k, they gave them an app that I don't remember what it was called, but you aged yourself. You took a selfie and it aged you 40 years. And that way you could relate to the future of you. You could think about yourself as I'm going to be 60 someday. What do I want? You can show that 20.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Interesting challenge. So almost a million members, I can tell you firsthand because my daughter is a public school teacher in California that for the teachers that are about 35 and under, they know our name, but they're not quite sure what the initial stand for. They've seen the word calsters because it shows up on their paycheck and they know that money goes out to it, but they don't even quite know what the initials mean.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Almost a million constituents. We do a lot of communication with the board. And what I've realized is we've had to expand the communication channels. In the past, it was all just written materials. But now we actually shoot videos for the board. We shoot videos for the membership and put those out there. One of the reasons I'm here, as you and I have talked earlier, is because I want to learn about how to do podcasts because that's going to be our next medium. And we've realized, I have said to the staff, particularly to the younger Gen X people, they need to figure out how to write an agenda item that can go on Instagram because we have some members that will only look at that. And we need to be agnostic as to the median, but just get the communication out there constantly. And you're right. A big part of governance is communicating and making sure everybody understands, but you have to have their attention. So it's easy to get the board's attention because they want to be up to date and get a quick summary of what's going on. The membership is...”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, a lot of that comes down to communication. You have a lot of constituents. So you have the board, you have a portfolio and a team, and you have all of the teachers in the state of California. How do you go about communicating with the various constituents?”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“When we get those rolls clear and everybody's on the same page, it can work fairly efficiently within that model. But I have seen the average tenure of a state pension CIO is only four years. And that has been true since the nineteen eighties. And I think the reason for the constant turnover is oftentimes the governance is unclear. And they run into problems about what decisions the board should make, what should they delegate to the CIO, what should the staff be doing. And if you look at what we do, it's very intentional, very specific, maybe almost too much planning, as I always like to say. We like to plan on what we're going to do, tell them when we're doing it, and then report back what we did. But that's the whole part about running people's money and gaining their confidence.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think the key with governance is clear definition of roles and responsibilities. All the funds I've worked at, which have been three, been very policy driven and very clear and concise policies, notebooks full. I'll take it back to what most people can relate to a financial planner. You come into a financial planner and you want to write a plan and be clear with them so that they understand your risk tolerance and your risk appetite. And what I find too often in governmental plans is that they actually haven't defined that well. And the risk appetite and tolerance shifts board to board as elections happen and things turn over. What decisions they should make, what decisions should they delegate to their professional staff, what's the oversight, what's the reporting back”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, that's a happy thing. Let's dive in a little bit. You mentioned that despite the flawed business model of managing these assets that you're still fighting the fight. What have you learned about governance that keeps you in it and keeps you trying?”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“And we're going to see a crisis of people the ladder into the baby boomer pulling out on their 401k and retiring into poverty. There's a happy thought.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“What do you need to build your workforce and attract your workforce? Do you need to provide dental? Do you need to provide vision coverage? Do you need to provide a retirement plan that rewards longevity? Or do you want a retirement plan that rewards mobility and turnover? There are some occupations where turnover is needed or even widely accepted. I'd argue that in teaching and education, you actually want longevity. And so it's better to offer retirement that's a defined benefit and so that you encourage people to work in the field for a long, long time. So I think people that are in this debate and fight need to step back and look at it. And I can argue that Wicks we have, instead of a pension crisis, we have a huge looming retirement crisis in America, which is in the 401k market. We're celebrating the birthday of the 401k this year. And when you look at that, most of those are grossly underfunded for what people need to retire.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“twenty percent funded or sixty two percent funded. And sadly, it seems to be the teacher plans. Public school teachers around the country, and some people have argued that maybe that's gender based. Public employee unions tended to be more vocal, and the public plans for employees tended to be better contributed to where the teacher plans tended to be underfunded. So most of the time when you look at plans around the country, it's the teacher plan that's the most underfunded. And some of them, yes, to amortize it over thirty years is going to be even too painful. They're going to probably have to amortize that catch up over 40 years to do it properly. But that's what's leading to this fight. Most of the time when I talk to people about the so-called pension crisis, it really comes down to their philosophical view about whether it should be a defined benefit or a defined contribution. That's a different discussion. I look at it as it's a benefit. It's unemployee benefit.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“on the many of the funds like ours are now very mature and have a negative cash flow, but it's manageable. You've got the Gen X behind them that are just as big or bigger. And so if you look at it as you've got to pay for longevity, you've got to pay for the benefits. But I think it's absolutely reasonable and when amortized over thirty years most of those benefit payments are actually reasonable and some states in the middle of the country did not fund their pension even fifty percent of what they were supposed to pay in for years. The term pension holiday. No one talks about a mortgage payment holiday. No one would dare try that, but they do that all the time in pensions.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“is you have thirty years to pay this off. And oh by the way, even when you get to the end of that 30 years, you have even more time because these are in perpetuity. So it's a matter of paying the right amount and developing a plan to pay them off. And that bill is expensive not due to the investment returns, due to the longevity. And then just management of liability side. I've seen too many governmental entities where mayors or city councils, county councils, even states, when they get into negotiation with an employee group and that employee group wants a raise, they offer them a retirement benefit instead because they know that's out into the future and they don't have to pay it now. Well, at some point those benefits add up. And it's on their mind simply because the demographics, you get the baby boom retiring. And that's just a huge swath of people that are now hitting the retirement funds.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“And it's not a rumor, but we get hit with it every day. Unfortunately, we clip all the news clippings and I just see it's overwhelming the discussion. But I would say to people it is similar to arguing that we have a mortgage crisis and that we have a lot of mortgage debt in America, but nobody worries about it because we're going to pay it off over 30 years. And these retirement funds will be paid off over 30 years. The crisis is recognizing what the real cost of them is. Most people have been underpaying that retirement system or underpaying your mortgage, and I've often said to legislators, try that for a while. Underpay your bank. Now they will reach out and grab you, and in a retirement system, nobody does. The retirement system would complain but quietly. The difference with the retirement fund and the reason it's not a crisis, in my view, in front of our face.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“There is this question of whether there is a pending pension crisis in the US, and particularly on the retirement side, is this crisis. Humming in such a way that it eventually will reform the system?”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I wouldn't say it's US specific, but you recognize in USA we don't react to something until it absolutely breaks. We won't repair something until there's a crisis and then we wake up. And I've often said that at some point someone's going to look at this and say, hey, this is crazy, a flawed model. We need to move it external and operate it. Oddly enough, Delaware is the only place that you've seen that happened in the 80s and nobody followed suit. There have been a few places, Missouri, Oregon, that talked about it, but then didn't go full throttle with it. So I think at some point there will be a recognition and just kind of a wake-up moment that, well, yeah, that absolutely makes sense. You privatize it, but we're not there yet. And I think the reason the USA model is different is simply because we're first. It evolved into the structure in the 70s and 80s in a government entity, and nobody thought to make it different. It's the entities around the world, the groups that have started from scratch that have had a chance.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“In the USA, the endowments were the first to recognize they couldn't operate within a university structure, and most of the endowments were then incorporated and moved off campus, near campus, but off campus. Corporations did the same thing. Many of them took their retirement division and said, this is a money management operation. We need to move it external. And many of them then spun it out to become a money management and make money from it. And the Canadians adopted that model. Most of the sovereign wealth funds, when they look at this space, the first thing they do is look at the models that are out there and say, you know what? We're going to operate it like Tomostic GIC is an independent company away from government oversight by government, but away from government. The USA is about the only place where particularly the pension plan asset management side is still very much part of the governmental entity. We're definitely in the org chart under the executive branch of California.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“And I always like to say it doesn't take a Harvard grad to figure out it's the flawed business model, but I'm just dumb enough to keep trying to make it work as efficient as possible. And if you look at it,”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“A money management firm inside the body of a governmental entity, and it is constantly a challenge. There's some research papers that now are probably over fifteen years old that say it costs about forty basis points a year. I've had a lot of pushback from my board. That seems like a huge number on our amount of assets. But frankly, it takes me almost nine months to hire a money manager because of the procurement rules. I have to use the same rules that Caltrans uses to buy cement or somebody else buys equipment. I have to use that to hire money managers. They don't recognize it as a professional service, which is very frustrating. Takes me a long time to retain people. All of my staff, including myself, are civil servants. And so there's just numerous little things that come up that make it difficult to operate.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“and I decided to go into government just for five years to kind of build some stability. I was tired of being in the roller coaster of the banking side. So I went on the buyer side and I found I actually liked it. And it surprised me. I enjoyed it. And I have shocked to say that I've stayed in government for over 30 years. Because, boy, it's a flawed business model when you look at it as a way to run a money management firm. But I've enjoyed the challenge. A flawed business model. Oh, yeah. Why don't you dive right in there? You bet. No, I've been pretty vocal about this for years and it gets attention every once in a while. But when you think about running a money manager, you know, particularly here in New York, there are partnerships, there are large public firms, there's a variety of sizes, but you would never pick government as a business model to run almost any business. I've often challenged people, what is it that government does well in that structure? But we're trying to run, I'm trying to run.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Chris, thanks for joining me. I'm glad to be here. How did you originally get started in the business? Boy, that's a long story. I was in college in the eighties. Before there were computers, Wall Street was hardly known on the west coast. I was going to be a financial accountant, interested in management information, that stuff, and my mom inherited an account at Dean Whitter, a name that has disappeared. And we had a blast going in a meeting, and I thought, this is really interesting to manage money, to follow stocks and trade. Took a couple investment classes at my university where we actually did real hard financial analysis of opening a prospectus and dissecting a company. And sadly, that is a very lost art most of the time. But actually started on the sell side. So started back with Dean Witter, got into financial planning, got into small corporations and their retirement plans.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source
“Managing a long term asset allocation cruise ship, inflation sensitive investments, risk mitigating strategies, private equity for a huge pool of capital, the Innovation Lab ESNG, and building influence among large asset owners. Most of my episodes are only lightly edited, but I barely had to touch this conversation with Chris. His articulate, chock full of wisdom, and as transparent as they come. Please enjoy my conversation with Chris Aylman.”
2019-02-11 · Capital Allocators · Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86) · IDENTIFIED FROM THE TRANSCRIPT · source