YouSaid · the spoken record

Dominic Garcia

lines on the record: 65
first: 2021-04-05
most recent: 2021-04-05
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“And then the second thing personal is when I was a kid, I was nine or ten years old, I stole from a friend, and it really affected me at that age. I really felt guilty about it, and I still think about it a lot today, how I felt and how it kind of messed up that relationship as a young kid. And since then I've never stolen anything. And that has been gum or anything else. And that's always sat with me about how you treat people, whether it's how small or big it is, and it's really important to make sure that you can empathize and have a rapport with personal one-on-one and just respect them as a person and try to do good by that person. And that, I still think about that as one of the big mistakes I made in my life was stealing a little something from my friend, but it really affected me at that time, and it still does.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Going to give you two one that's kind of investing oriented and then one that's kind of just life or personal. From an investing point of view is part of what we start we're talking about. When you're looking to include a new long-term strategy, one of the mistakes that I've made more than once is not recognizing or fully appreciating that your starting point of your strategy actually matters a lot. You can have one of the best long-term strategies, but if you implement it in a short term bad spot, it can just derail the whole thing. If you open up with a bad performance or return stream, it can be hard for you to continue to convince people to keep it. And I think that's been a lesson that I've learned a couple times is even though you have a great long-term strategy, be cognizant of when you implement it.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“This was a recent book that I read and it talks about this idea of be do have. So you want to focus on being first, doing second, and then whatever you want materialistic or have comes last. For me, I think I had it the reverse when I was younger, and I think most people do. I looked at what do I want or what do I want to have first? What do I need to do to get that, and then I'll be whatever I be to have that? So I've learned to do the reverse, which means to focus on your passion first and what you care about, and then everything else kind of falls into place.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“When I was a kid, my dad used to listen to motivational tapes, so a lot of like Dale Carnegie, those types of folks. I soaked a lot of that up, and my dad used to always say a positive mental attitude can overcome anything. Positive mental attitude is kind of what sets the world ablaze. And so that's always set with me is be optimistic to have a positive attitude no matter what comes.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Think when marketers say, you know, you kind of got to act now, right? Like, oh, our closing is July 1st, and if you don't do it then, you won't get this. And I don't like Act Now. That doesn't sit well with me.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think someone who is uncompromising, somebody who doesn't see that pretty much every issue there's two sides, whether it's political investment, whatever it is, there's always two sides to a story. And so I think somebody that doesn't take that into account or able to see both sides of things, that irks me.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Good question. I'm a big fan of Way of the Warrior. I don't know if you've seen this about the spiritual journey of doing the pilgrimage of Santiago in northern Spain and getting to your spiritual IQ and I really appreciate those. So in addition to my favorite book, I think some recent writings that I liked are one I appreciate Kanakundi's blog. I like reading that regularly. I think he has great insights on technology, which I've really helped used in what we're trying to build in our technology and bringing his advice I think has been helpful. That's a more recent thing that I've appreciated.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“I do twenty to thirty minutes of yoga and meditation in the mornings, and I think that kind of sets me up for the full day, evens out my emotional state and my mental state. I run nearly daily as well, so I think those things combined are probably my most important daily habits.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“I live here in Santa Fe, New Mexico, and for those of you that don't know Santa Fe, we're about 7,000 feet up beautiful scenery, beautiful weather, beautiful culture. I live at the foothills of the mountains here, so I do a lot of trail running. I really love the trail running, running at seven thousand feet, going up and down all the trails and hills and mountains. It's just a gratifying, challenging, all the above.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Over the next five to ten years because there's no data to back it up. It's truly a speculative endeavor. I don't want to pick on Bitcoin, but let's say new thing A how does it perform in an inflation scenario? How does it perform in a gross scenario? Heaven knows, right? And so when you're building a portfolio of betas and alphas that are based on allocating diversified risk, where do you plug something that's brand new when you have no clue how it's going to perform indifferent economic environments? In terms of Bitcoin, I'm willing to crow on this, but Bitcoin is, I think, a burgeoning replacement of literally currency and gold. If governments are not going to embrace it, honestly, it should go down to just the technology value of it.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's difficult, and again, and I think the reason why that's difficult is in a public pension setting or any long-term institutional asset owner should be thinking over the long term. And to me, that's 10 plus years, 10, 20, 30 years. And so when you do that, we don't buy something and look to trade it, buy it, put in the portfolio and sell it a year later. That's just something that we're not going to do. And quite frankly, I think folks that do that, there's a light track record and success for that. So when you're actually looking to put a strategy into your portfolio, you're expecting it to be in for five, ten plus years. And so when you do that, I think you need confidence that it will not necessarily perform, but it will behave how you expect. And so something that's brand new, there's truly no way to expect how it's going to behave.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Bold from a beta and alpha perspective is quite attractive, the underlying components of infrastructure, a line really well with a pension system, and given low returns on bonds and cash, I could see investors using infrastructure as a replacement somewhat for that. And I think infrastructure is going to be a very interesting place to be in the United States just from a public good point of view. I like those areas, but overall I would say I'm bullish alpha. If you're going to seek managers that look for idiosyncratic risk and are going to take higher amount of all.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think, as we kind of alluded to, beta, I think, is going to be challenged over the medium and long term. I think over the short run, maybe 12 to 24 months. You can see a continuation of what we're seeing. But over the medium and long term, I think generating the returns that you've seen in the past is going to be difficult in beta. So I really think alpha, and I think alpha across the board is going to be pretty attractive. I particularly think hedge funds should be a great space going forward. There should be a lot of dispersion amongst what happens in industries, dispersion amongst companies, even dispersion amongst geographies. In my mind, the more unconstrained strategies are typically hedge funds can I think you can eke out more excess value that way. I think private assets will continue to do well. In the private asset area, I'm pretty enthusiastic about infrastructure. I think infrastructure”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“broke out that 12% IRR, 8 to 10% of that is just simple beta that you can get for one to two basis points. And we're paying fees on that whole thing. The reason why you want private equity is because they can produce a spread over that PME and they offer you a smoothing kind of mechanism. So the more you able to analyze private equity managers on that direct alpha on their excess value that idiosyncratic risk they generate there's going to be a lot more differentiation of what you buy and what you don't buy. To me that's extremely analogous to the way we think of the hedge fund portfolio or your traditional long only portfolio. It's the same analytical process, the same diligence process. It just takes a little more data work. And that's the way we treat our private assets. We're differentiating and we're differentiating them in that same way.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Quantitative analysis is just really burgeoning into those private assets, similar to what happened in hedge funds a decade or a decade and a half ago. And I think that's really going to change how allocators look at and select managers. For instance, and I'm going to give you an example for us, we actually have a paper out on this that we produced with landmark partners. We focus a lot on direct alpha and excess value. I think a lot of investors, if not almost all investors, when they buy a private equity strategy or a manager, they look at IRR, right? They look at IRR TVPI, what's the total return? We look at direct alphas KSPMEs. The reason why you buy private equity isn't for the total return, in my view, it's the relative return to Euro because a private equity portfolio or private equity manager may just give you an example. Let's say they generate a twelve percent IR.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think the private assets are more of a challenge. And what I'm going to say is I kind of talked a little bit about my initial start into this industry, but part of it was building the hedge fund portfolio back in 2004, two thousand five. And if you go back to hedge funds a decade or a decade and a half ago, it was an industry that was a little bit more black box and you just kind of signed up for things. And between now and then hedge funds have really institutionalized, right? It's really matured as an industry really transparent, et cetera. When you go to the private asset world, and particularly let's say private equity, I think private equity is where hedge funds were like a decade ago or so, right? It's a very networky type industry. You kind of sign up. I think private equity and the private asset classes are going to institutionalize and mature going forward. I think data”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“But I think a majority of the hedge fund world has a big beta attached to it. And so there's a different philosophy with that type of manager and the way they run their business, the way they interact with clients, and the type of clients that they have, that doesn't fit for us very well. What really fits for us is somebody that is really idiosyncratic driven trying to squeeze out all the beta it can in that portfolio and trying to be really almost a hundred percent skill based. Now that tends to maybe have a little bit of a lower return profile, but that's okay for us because we're porting them over something else. And so managers that understand what they're being used for in the portfolio, I think that's a differentiator for us.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“They just say, you know what, I'm just here to gather assets, and I'm here just you're either in or out, it doesn't matter. Specifically in the hedge fund, I'm a big proponent advocate of hedge funds. I think pound for pound on a risk adjusted basis, they're some of the best asset managers on the planet.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“So I think the subtle difference is sustainability persistence consistency of their alpha. And so that's a very quantitative analysis on a lot of measures. And I think that becomes very important. It's very hard to forecast alphas, but you need to have good confidence that what you're buying can be persistent going forward. And I think part of the big reason for that is past data. And so I think that's very important. The second subtle difference I would say is that firm philosophically orienting themselves to alpha generation? Are they philosophically oriented to what we're trying to accomplish or at least empathizing with what we're trying to accomplish?”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Capture ratio of that gross and a manager that understands that and is able to be flexible with us in constructing fee structures, I think that's a really important piece for us.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“very well. And I think that's actually a key attribute to sustainable alpha production for managers is not just that they can find a good idea, but that they're allocating the right amount of capital to those good ideas and not to the necessarily the second tier ideas. So then I think the other piece is qualitatively is I really appreciate a manager that has high alignment to us. And I think alignment means that we're in the same boat. They have skin in the game. They eat their own cooking, they have a large amount of their own capital in the same strategies, and that they're very aware of their fees. Everybody would love less fees, but I think what's more important for us is that the fees that we're paying were getting a good deal based on the alpha. And so we like to call it a capture ratio. So based on the gross alpha that a manager can generate, we're trying to get to sixty to seventy percent.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“In our alpha score, I would say there's a couple of things. I think from a quantitative point of view, a manager that their return stream is really oriented towards idiosyncratic risk. If we are able to break down their return stream, they have a modest amount of beta in their excess return stream, they have a modest amount of factor exposures, and they really have mostly idiosyncratic risk. I think that's really important. The second thing is I like managers that really build a moat, that have really have a sustainable edge to what they're trying to do, and then they build their entire business around that sustainable edge. But in addition to that, they take risk with high conviction, meaning they really focus a lot of their risk and capital into their best ideas, not into their second tier ideas. And so they're able to allocate that capital and allocate that risk to their best ideas.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“And if you have a four, anywhere between a four and a two based on our scoring method, if you have a four, we want to allocate more risk to you. If you have a 2, we're going to give you less risk. And so this alpha scoring process, our diligence process, our risk budget then feeds how we actually allocate risk and capital to our managers. And then we have a pretty nice modering process in that. So for us, what I think is we do have a modest staff, but what's been really, really nice is being able to build out a very systematic process, add in consultants, and then add in technology, and I think that helps us really manage well the alphabet with a modest staff. And I feel like it would be nice to have a little bit more staff, but honestly, I think I feel good about where we're at in managing that alpha book.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“And so, what we've done is we've built a pretty thorough internal process of manager diligence. So I'll have staff, which I call my alpha team, they're focused on each one of those three business lines that I mentioned. And so they kind of lead the process and they lead diligence. And we work with, in parallel, we work with consultants in each one of those buckets to kind of help us along in terms of sourcing, et cetera. But our internal process, I think, is pretty robust in a sense that we've built out a very detailed diligence process, and then what we do is we also create an alpha score on our managers. that we score all of our managers on. And what we do from that scoring process is we say, okay, out of that, we build out conviction in our managers. So our managers can have a four or they can have a two depending on that alpha score.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Take a step back and let's talk governance first before I go into manager selection. So as I started one of the first things that I engaged our board with was I said Hey look, if we're gonna try to do things better the first thing we got to do is we've got to change our investment governance So what our governance looks like today is our board makes three decisions They set our overall risk tolerance they approve our risk budget as what I've been talking about and they set benchmarks Everything else gets delegated down to staff so the manager selection process is delegated entirely down to me and our staff and so what our marching orders are is implement the risk budget basically maybe do a little better and so manager selection it turns out works pretty well in that governance structure I'm fortunate that I have staff that are quite skilled and knowledgeable about the external manager universe and being able to build unique fund of one structures”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so we expect the overlays to be a zero contributor over time because all we're doing is we're minimizing the risk that we don't want and emphasizing the risk that we do want. And the risk that we don't want, you should produce a zero. So we expect zero with the overlays. We've actually been a little bit ahead on the overlays, but our expectation is not to make any money. It's to minimize our risk.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“It depends on your point of view. So the notional amounts are fairly large, maybe a billion, for us we're a sixteen billion dollar plan, so the notional amounts could be a billion dollars or so. But the actual cash exchanged is really more like twenty to thirty million dollars. So it's really a modest cash exchange because the overlays, again, we're buying and selling markets. So for instance, we're going to be long MSCI world and short Japan, or just as an example, which you're really hedging out is that residual. And so there's not a lot of volatility to it, but the notionals can be fairly fairly large.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“On our beta book, all of our benchmarks are public oriented, and so the biggest slippage that we have is having this valuation lag relative to our public markets. And so the tracking error that we're generating from our private assets, a good chunk of that is really this lagged effect relative to our public market equivalents. It catches up over a three year rolling, a five year rolling period, but that's really where the slippage is, is trying to measure your private assets back to a public market equivalent and trying to ensure that that smoothing or lagging effect is minimized when you're really evaluating. There's some statistical maneuvers that you got to do to do that, but there's never a perfect fit for that.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“We have two providers that help us with that, and so what they do is we give them a look into our portfolio, at least on a monthly basis, we'll talk with them and make sure we're both seeing the same amount of risk, and then they'll put on those different hedges on a monthly basis to ensure that we're minimizing the risk that we're looking for. And again, it all starts with our risk budget. So because of our risk budget, we're able to have a very specific and directed conversation with those overlay managers of what we're trying to stamp out”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“At best, a beta of one matching back to our beta risk budget, and that all that's left over in our active strategies is mostly idiosyncratic alpha oriented return streams.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“And so what we do is, for instance, let's say we like active management in non-US equities or in small cap equities. But non-US equities relative to the MSCI world will generate two risks. It'll have a geographic risk and then the stock picking risk or the idiosyncratic risk. All we care about is the stock picking and idiosyncratic risk. So what we'll do is we'll have an overlay that hedges that geographic risk or that cap risk back to our benchmarks or back to our beta book so that all that's left is the residual idiosyncratic risk. And then in addition to that, and this is true in our credit portfolio, some of our credit strategies tend to have a beta that's five relative to the high yield index. So we'll actually have a synthetic CDX or eyebox overlay to put us back up to beta of one.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“And so we're doing that with anything that has any beta attached to it. We're making sure that the right amount of risk is measured and accounted for in the beta book, and then the residual idiosyncratic risk or tracking errors is in the alpha book. But in addition to that,”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“So it really gets back to our risk budgeting process. So I'll take an example. Let's say our private equity portfolio. So private equity in a very simplistic way has maybe two return streams relative to our beta book private equity we're benchmarking to the MSCI world. So if our private equity book is going to have X amount of exposure to MSCI world and then it's going to have a Y amount of exposure that's idiosyncratic, tracking error relative to MSCI world. And so private equity in general is going to have something around 10% tracking error to MSCI world over time. So we take that tracking error and we put that into our alpha book. But the exposures that are MSCI world that is in the beta book. And so we have to use our technology process to ensure that that tracking error is well evaluated and well measured.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“In our private infrastructure assets, we'll put those all into one book, and we're expecting them to generate a three to four percent alpha or direct alpha over our PME. So those are the areas that we play heavily. So long biased strategies that take high amount of tracking error that are more concentrated, take high active risk. We really like market neutral hedge funds that are more persistent, really idiosyncratic risk oriented. And then we're looking at private equity, private real estate, and private infrastructure as big drivers of direct alphas relative to their public market PMEs. And when you put all those together, that alpha book turns out to be around one and a half to two percent of vaL in of itself, and we think that can generate about a one percent alpha at the total plan level.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Individual strategies that were invested in just long only, long biased alpha management. And then in addition to that, what we're doing is we're buying hedge funds. We're buying market neutral hedge funds because on a risk adjusted basis, hedge funds are still pound for pound the best alpha generators. And so what we're doing is we're building a market neutral hedge fund portfolio we think can generate something around a three percent excess return or alpha over cash. And then we're porting it over our bonds. So we're making it a portable alpha structure. And then the last piece is we view private assets as alpha generators and what we do is we take a very distinct approach, we build out PMEs, public market equivalents for all of our private assets, and we optimize around a direct alpha. And so what we're doing is we'll take our private equity, our private credit, our private real estate.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, the first thing is we view private assets as not asset classes. We view private assets as another way to access active management or alpha. So at a very high level, we're building three big books, three alpha lines or business lines. We're building a long biased alpha line. So in non-US equities, emerging market equities, small cap equities, long only base strategies. But what we're doing is we're making sure that those strategies have a high concentration, high active share. We're not buying benchmark huggers. We're buying things that zig and that we expect two to three percent alpha out of them over time. The same is true as in fixed income. We're doing similar things in fixed income, alternative credit, and then on to reits and listed infrastructure in real estate. So we have a book, we have thirty two different individuals.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“I'm not sure. I think there's a handful of plans that do this. Obviously Swib has a variable payment on their cola. South Dakota has something similar. There's really only a handful that have this. I think we're one of the few that were able to get something done over the last year or two, but this is something that I think across the country public pensions are going to have to deal with. Either raising contributions, changing the benefit of some sort, or having some other asset based solution to help fill that hole of unfunded liability.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Mechanism is a much better and holistic strategy going forward, and so I jest, but that was our best investment strategy of 2020. And it really sets this plan, this plan will be here for the next couple generations, just based on that.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Whatever cola you receive, it's going to be now be a profit share. It's going to be based off of the funding level and the returns that we generate. So what that means is our actual base benefit, the cost to pay that base benefit, is actually more like 5.5 to 6% investment cost. And so going forward, if we can exceed that base cost of 5.5 to 6%, then we will share those gains in a profit share cola. So going forward, we are on a much more sustainable path and we project over the next twenty-five plus years that we'll be close to being a fully funded plan. And so what this new structure allows us to do is if we generate returns over and above that base cost, not only are we sharing that with our participants in a profit share cola, but we're also taking a portion of that and banking it to the unfunded liability over time. And so this”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so this is probably one of the best things that happened for us in 2020. Again, taking a playbook from Swib and other plans that have done really well on funding sustainability perspective in 2020 we were able to get a pension reform passed and it did two big things for us. The first is it increased our contribution rates near our arc or the actual required contribution and the second thing is it created a variable cola for us and this is a very big deal so prior to this change our benefit structure the day somebody retired they had a base benefit the promise guaranteed benefit that we're going to provide guaranteed cola that they were going to receive and so what we did in 2020 was we decoupled those two things we said you're still going to get this promise benefit forever but going forward”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Is about 10% at the total asset allocation level, so we think we can get somewhere around a six percent ish six to six and a quarter percent and just the beta book with that. And then the alpha, we still think we can generate about a one percent alpha going forward. Obviously that's a much more difficult thing to achieve and etc. But I think when you put those two together, you can get to about a 7.5% return.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“Great questions, so a couple of things is as you know, if you were a sixty forty investor for the last thirty years, you generated eight to nine percent. But the thing is that eight to nine percent, half of that over the last thirty years was just from cash. And so your cash return now is probably zero. And so how do you generate enough with a cash rate of zero? And for us, just beta alone in the allocations that we have, I think is going to get you five to six percent. And so what we're looking into right now is what if you incorporate appropriate leverage on your assets in the beta book, can you get an extra 50 to 100 basis points out of that? And so I think that's a key challenge and a key issue for folks going forward. And so for us, what we're looking at is in our beta book, we're looking to incorporate embedded leverage in the asset classes and then about in a very modest amount.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“separately and then we'll allow for overlays and etc in the alpha book so that we ensure that we're separating and ensuring that we're not doing double duty with the beta. And so when you separate those two things, optimize them individually and bring them back together. What ends up happening is your alpha book tends to be quite low correlated to your beta book and so the total risk it generates is quite low. So what you're getting is just an overall improvement in your risk return ratio at the total plan. But for us, we explicitly set two risk budgets for each and then bring them back together and then we manage to those risk budgets.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“so that we can meet that risk objective and more importantly that return objective, but we're going to ensure that we have diversification so that we're being as diversified to those three macro factors as possible. So that's beta. And then so in alpha space, we'll say, you know what, in addition to the risk we're taking in asset allocation space or beta, we want to take up to another 2% tracking error relative to that beta that we're taking. And up to that additional 2% tracking error, we think we can generate one percent excess return or alpha. And so what we do is we literally separate those two things into risk budgets. And there's really only half a dozen betas that we allocate to in reality. But in alpha space, we have about 26 different opportunity sets that we will allocate to. And we'll optimize those two things completely.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, the first thing that we really think about is, all right, we have these funding objectives in the total plan. And so based on those funding objectives, what's the amount of risk we need to take in the portfolio to meet our return hurdles? And so first is setting the appropriate amount of total risk. And then second is saying, okay, and then I'll just use it as an example. Let's say the total risk that we want to take over a long period of time, call it 10 plus years, is about 11% volatility. So what we do is we take that 11% volatility and we say, well, we're going to break it into two pieces. And we call this our risk budget. So the first piece is going to be our beta or our asset allocation. And this will drive most of our volatility. And what we say is, okay, we're going to build an allocation on our betas, but we're going to be very mindful of the risk it generates to three macro factors. And one is growth, inflation, and rates. We're going to allocate that beta.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“By instructure external strategies. And so when I actually find the talent because of our strange personnel situation, I tend to skew on the younger side. And so what I tend to do is I offer more the value proposition I offer folks are you have more autonomy, you have more ability for innovation and growth and learning and that is an attractive substitute for the comp that I can't offer or that others can offer elsewhere so it tends to skew a little bit younger but the ability to work in a more dynamic or environment with more autonomy and more responsibility I think that's been the trade off and it's so far it's worked. The trouble is when those folks get a little older they're a lot more marketable the issue is really going to be retaining in that model”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a couple of things. One is when you build out your investment process or your investment team, I think there's a couple of things. From our standpoint, we take on the philosophy of separate alpha and beta and not only public assets, but also private assets. Let's be risk managers and risk allocators first and then not capital allocators per se. And so that's kind of where we start. But then the second thing is, you know, okay, how do you implement? You could either implement through internal means or through external means. And so when you kind of have a strained personnel or strained compensation structure, it's very difficult to do any internal asset management. In the internal asset management mainly helps in cost reduction and it saves quite a bit of money over a five to ten year period of time. So we actually end up being 100% external. And so what's important for me is to have a staff and a talent base of our staff that is very versed and seasoned about how to”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's a challenge. I've been here a little over three years and we've done a lot to change the way we do business, but that one, the compensation and setting our own budget and personnel, that one is the most elusive of all, and it really gets down to a much different type of conversation with policymakers and your board about how they view staff and the value proposition of staff. And it's a very difficult issue. It's proven to be the most elusive that I've tried to encounter.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“There is, so it really depends on the system. I'll give you an example. So for us here in New Mexico, our budget is still based off our board sets our budget, but then it goes through the legislative process still, right? And so we still have to go get approval every year from the legislature and then subsequently from the governor. In other pension systems where I talked about that other half where they have some incentive comp, they're allowed to have flexibility in their budget. So like at SWIB, they were able to have a basis point banned for building their budget, which meant that as long as they're within some level of basis point or expense ratio cost relative to the total assets, Swib had the flexibility to build out its own budget. We, on the other hand, don't have that, right? We still are part of the government wide personnel system, having some exemption from that would be a huge boom. And I think a handful of public pensions have that as well.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source
“And so it is a challenge, and in my experience, I think that's been one of my biggest challenges in the role that I have today.”
2021-04-05 · Capital Allocators · Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187) · IDENTIFIED FROM THE TRANSCRIPT · source