Asset Allocation, Consultants, Defined Benefit, Governance, Institutional Investors, Pension Funds, Performance Measurement, Private Equity, Public Funds

Asset Owner Profile: Washington State’s Bruebaker Set on Securing Public Employees’ Financial Futures

Gary Bruebaker, chief investment officer of the Washington State Investment Board (WSIB), oversees $128 billion in assets, a portfolio that includes the retirement assets of over three quarters of a million current and former public employees. Having such a large pool of investments under his discretion and having booked more than 40 years in the business, Bruebaker has learned a thing or two about the importance of planning ahead, as evidenced in the annual planning process he instated at the fund. He also exhibits a deep affinity for things and people with staying power–be it the vintage cars he collects or the employees he has shepherded through the ranks of the WSIB during his tenure there.

Gary Bruebaker, chief investment officer, Washington State Investment Board

Bruebaker took some time from a busy day to speak with Institutional Allocator about his history, his management approach and what he enjoys doing when not at work. 

Tell us about our career path? Where did you go to school and where have you worked since then?

I received a Bachelor of Science degree with honors in business administration from Oregon State University and a Master’s Degree in business administration from the University of Oregon. I hold the Chartered Financial Analyst designation and am both a Certified Cash Manager and a Certified Public Accountant.

I started my career as a senior auditor for the Oregon Secretary of State Division of Audits in 1978, where my job was to serve as a check and balance on financial management and reporting, while offering improvement opportunities in financial management for state agencies. I then served as the controller of the Oregon Housing Agency beginning in 1983, where I had the opportunity to assist in providing affordable housing to the elderly, disabled and first-time home buyers, issuing tax-exempt debt, and investing reserve funds. Following this opportunity, from 1987 to 1988 I served as the controller, then as the director of finance (1988 – ’92), then as deputy state treasurer for the Office of the State Treasurer in Oregon (1992 – 2000).

Next, in 2001, I had the opportunity to take on the job of chief investment officer for the Washington State Investment Board, which manages the retirement fund assets for more than 780,000 current and former public employees. 

I also, have the good fortune to serve as a trustee of the Financial Accounting Foundation Board of Trustees, after having served three years as vice chairman, and on KKR Investors’ Advisory Committee, TPG Investors’ Advisory Committee, and on the Pacific Pension Institute’s Investment Task Force.  

I’ve been in the business for more than 40 years now. I’ve seen the whole marketplace evolve, and hopefully I’ve evolved as well.

What is Washington State Investment Board’s (WSIB) asset allocation breakdown?

Our current asset allocation for the defined benefit plans assets is 32 percent public equity, 23 percent private equity, 20 percent fixed income, 18 percent real estate, and 7 percent tangible assets.

How would you describe /characterize your investment philosophy and/or the investment philosophy of the fund?

The WSIB is a global investor responsible for $128 billion of assets, invested on six continents, in 84 countries, within 49 different currencies, with more than 15,000 individual holdings. It ranks among the five best-funded public pension plans in the United States.  

Our investment philosophy is clearly outlined in our 17 Investment Beliefs. At the core of these beliefs is a commitment to keep the financial needs of our beneficiaries at the heart of every decision. Therefore, we practice a clear mission of maximizing our investment returns at a prudent level of risk for the exclusive benefit of our members. This entails focusing on long-term results, maintaining discipline in all market cycles and employing the best-in-class investment staff and partners.

Annual planning has become the foundation of the investment management here at the WSIB. Annual planning occurred as an evolution as opposed to any sort of revolution. During the annual planning process, each asset-class team evaluates the capital markets and opportunity sets, and then establishes reasonable expectations for where they will deploy capital in the coming year(s). We also work with outside consultants for input.  All of this is presented to the board during our two-day December planning meeting. 

How long have you been using this approach?

We started by conducting annual planning for only private equity in 2002, and then we expanded our annual planning effort to include real estate. Eventually, we expanded this discipline to include tangible assets, risk management and global equity—for all asset classes except fixed income, which does not lend itself as well to annual planning.  Annual planning now has become a core part of our investment management process.

How has this helped your management of the fund?

This annual planning process really sets the stage for deeper dives into the investment portfolio as the teams prepare for the annual plan discussions with the Board. It is not dissimilar to someone preparing to lead a discussion on a complex topic—having to prepare much more so than someone preparing to merely participate but not lead that discussion. Annual planning also sets expectations with the board, allows a cohesive plan encompassing the total investment portfolio and facilitates the planning process for organization management (e.g., budgets, data needs).

To implement the annual planning initiative, every year, each asset-class team at the WSIB develops an in-depth plan, which is a tactical blueprint for what we want to accomplish during the next year and a strategic view of where we think we’re going over the next five-plus years. Those plans are presented directly by staff to the board, whose members review and approve them. We use this planning as our map for implementing our program over the course of the upcoming year.

Do you typically get some pushback from the Board?

We have great discussions with our board members during the planning process. The board has a thirst for fully understanding the opportunities, challenges and resources required. 

What is your plan’s funded status?

As of June 30, 2017, our state retirement plans averaged 86 percent funded on an actuarial value basis. Our newer open-plans ranged from 88 percent funded to 109 percent funded on an actuarial-value basis, while the older closed plans ranged from 57 percent to 131 percent funded on an actuarial- value basis. 

Why such big variations? 

The plans with lower funding status are the older closed plans. These closed plans have very little employee contributions as most of the members are in retirement status and the state was less vigilant about funding the contributions in the earlier years. This is not the case with the open plans. Given that these are closed plans, the issue will be “self-correcting” and go away when the plans do. Current actuarial projections indicate all our state retirement plans to be fully funded by mid-2029. If we combine accrued assets and liabilities across all our plans, including all 17 of the pension plans, the funded status is projected to exceed 100% by 2022.

How are you achieving this? 

The employers have increased contributions.

What is the key to your plan’s funding-status success?

The key drivers for a strong funding status are:
·A board with enough discipline and education to remain strategic in all market conditions, while resisting the temptation of overreaction to fleeting headwinds.
·.A staff that builds deep and longstanding relationships with managers and general partners.
·A legislature that sets prudent contribution rates for employers and employees, while avoiding the temptation of cutting contributions during periods of strong investment performance.
·A State actuary who is credible, and able to carefully estimate our plans’ assets and liabilities against a backdrop of shifting demographics and market conditions.

Honestly, we have the best employees I have ever had the good fortune to work with, and I am most proud of them and their achievements—all of which benefit our stakeholders.

What was the best experience in your career?

It comes down to making a difference in people’s lives! This is true for both our stakeholders, who trust us to manage their hard-earned money, and for our employees who work tirelessly to do so. We get to see the tangible results on a regular basis.

Our investment professionals and partners understand the reason we are here is to secure the financial future of public employees and their families here in the state of Washington. For example, our real estate team and real estate intermediaries really believe in what they are achieving in the real estate program, beyond investment performance. They are helping serve life needs meshed with business opportunities for quality property developers/managers, which in turn feeds sustainability of these opportunities. 

Many people who we hire on here have come from asset gathering firms, where the motives and incentives are aligned differently. They like working at the WSIB where mission is aligned with serving peoples’ retirement needs. We see the results when we compare our investment results with applicable investment benchmarks; and we have done quite well by this measure.  

Any examples of how you measure success?

As a very recent example, WSIB’s investment performance is top decile, according to Cliffwater Consulting, for the 17 years, ended June 30, 2017. We also see the results in the achievements and professional development of our own employees. Our 47 investment professionals, collectively, have 85 college degrees, 38 professional designations, and more than 892 years of professional work experience. 

Today, we have an investment officer and a senior investment officer, Kristi Bromley and Brian Shrader, respectively, both of whom were administrative support staff when I was hired on here 18 years ago. We also have numerous other senior-level investment staff who have earned promotions over the years. Honestly, we have the best employees I have ever had the good fortune to work with, and I am most proud of them and their achievements—all of which benefit our stakeholders.

I have always believed that investors should never waste a good crisis. There are always opportunities, especially in a crisis.

What was the worst experience in your career? 

That would have to have been the Great Financial Crisis. Many investors lost 35-40 percent of their portfolio value in a few weeks or months. Global contagion was frightening, financial systems failed and nearly collapsed. Liquidity became something between expensive and non-existent. Our board did not de-risk during this time, but it was a painful experience which raised lots of discussion and concerns. 

Having said that, I have always believed that investors should never waste a good crisis. There are always opportunities, especially in a crisis. During this ’07-’08 liquidity crisis, some large public funds with private market investments publicly directed their general partners to stop calling capital. They didn’t have the liquidity to make the capital calls without making some difficult trades.

We did the opposite. Investing is very much a relationship business. We took the opportunity to call each of our core general partners and committed to them that we would be ready with enough liquidity when their funds needed to call capital. We were good for those capital calls, despite the market decline. We wanted to deepen our relationships in a turbulent time, so they would know we would be committed to these investment strategies for the long run.

It’s important to have high conviction when the markets are going against you, and when people are publicly questioning whether what you’ve done was the right move.  We remained committed to our long-term direction and remained a reliable investment partner which deepened our relationships.

Clearly, you have to completely stress test your own thinking to see whether you’ve got some things wrong. You evaluate the sources of liquidity to determine the best (or least painful) way to raise the capital and learn from these painful experiences. For example, we have more money invested in Treasuries going into these markets than we had in 2007-2008. But for the most part, that’s when you’ve got to really reinforce your conviction.

In what part of the industry have you witnessed the most change?  

Private market investing, especially private equity, has undergone immense change. The numbers of both General Partners and Limited Partners have grown tremendously. General Partners have gone public and significantly increased the number of their product offerings. We have seen General Partners change their investment strategy from financial engineering to value creation along with exponential development and institutionalism of the investment process in this market segment. Advancement has included more formalization of the 100-day plans, improved investment advisory roles, and expanded proactive communication around investment processes. 

What aspect or element of the industry would you most like to see changed and why? 

Personally, for me the answer is providing all people with effective access to reasonable and well-funded defined-benefit retirement plans.  Related to this, but not specific just to the investment industry, I would like to see less of a gap between those at the top and bottom of the income chart. This is more of a policy question (and debate) than an investment question. Unfortunately, I have to admit that I am not a policy expert. However, while I don’t know the answer, it doesn’t change that I believe it needs to be accomplished. While I believe everyone needs to earn what they get, I also believe everyone deserves a true opportunity in the marketplace to do just that.

What sort of opportunity? Education would be a great start. In the long run, a widening income gap hurts us all, not just those suffering from being at the bottom. The biggest issue is a values/morals based-one. It is just wrong to have such large gaps. Additionally, civil unrest is not good for anyone and such gaps tend to create such unrest.

Gary Bruebaker on Summit Lake, Olympia, Wash., 2017

Are you married, have children, hobbies? 

My wife and I have three children and six grandkids, all of whom live here in Washington. I enjoy boating, wake surfing, scuba diving, kayaking, riding our WaveRunner—basically, all things water!

We own a home on Summit Lake here in Olympia, Washington. My sons and I are “car guys,” so we also enjoy working on cars as a hobby—anything German for them and ‘60’s muscle cars for me. I have a Mustang GT convertible, a 1981 CJ-5 with a 400 hp LT1 motor, and a huge 4-wheel drive truck my sons and grandsons love! We attending the Barrett Jackson and Mecum car auctions every year. 

Are you a fan of Jay Leno’s collection?

I am a fan of everything Jay Leno—especially his car collection, shops and his sense of humor about life!

What was the last book you read and next book to be read? Next travel plans?

The last book I read was “Can American Capitalism Survive” by Steven Pearlstein, and the next book I’m going to read is “Factfulness” by Hans Rosling, which Bill Gates says is the most important book he has ever read. My next trip is to visit an old high school friend in Kingman, Arizona, and to embark on a short tour of Route 66.

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