This week, IA reporter Kaitlyn Mitchell spoke with Craig Husting, chief investment officer and assistant executive director of the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS). Husting has been CIO of the $44.5 billion funds since 1999 and has made some major changes during that time: the investment staff has grown from three to 17 people, the funds’ assets under management (AUM) have doubled and their asset allocations have shifted from a bullish focus on stocks and bonds to private equity, private real estate and private hedge funds.
Despite turbulent headwinds, PSRS and PEERS investment returns for the last five years exceeded 65% of their peer group (as defined by the Wilshire Trust Universe Comparison Service for public pension plans with assets in excess of $1 billion). The pension systems generated the investment return while taking less risk, as measured by standard deviation, than approximately 75% of comparable public funds.
Curious how Husting accomplished all this? Read on.
KM: Your fund’s AUM was at just $22 billion in 2003 and $28 billion in 2006. How did they reach $44.5 billion?
CH: All through investment earnings or market appreciation. The pension systems have a negative cash flow (contributions less benefit payments) position of approximately $1 billion per year. So, the total investment portfolio appreciation since 2003 is actually over $32 billion. Annual contributions to the systems are less than the annual benefits we pay out. We don’t lose a billion in each year but we do pay out benefits each year that are just over $1billion more than we take in through contributions.
KM: You’ve done a lot of hiring in your time with the fund. Please explain.
CH: We’ve grown quite a bit. When I started in 1999, there were just three investment people, including myself. We have slowly grown the staff over time as we have implemented new investment programs, including hedge funds, private equity, private real estate and private credit. The total staff today includes 11 investment professionals and six investment operations professionals. We believe the operations staff is particularly important to track fees and manage private capital calls and distributions.
KM: What is your institution’s asset allocation breakdown?
CH: We manage the portfolio based on three broad categories: safe assets, public risk assets and private risk assets. We have 20% in safe assets, which includes cash, Treasury securities and Treasury Inflation Protected Securities (TIPS); 60% in the public risk category, including equities, credit and hedged assets; and 20% in private risk assets, including private equity, private real estate and private credit.
We are currently underweight to safe assets with a higher than normal allocation to cash, because we have an expectation that interest rates could rise.
Within public risk, we are underweight to public equity, because we believe the equity markets are fully valued. And we are overweight to hedged assets, which should provide more protection in a potentially down market.
We are continuing to build out our private assets programs—in a measured process over a number of years.
KM: What are your funds’ funded statuses?
CH: We were 84% funded as of June 30, 2017. Obviously, we would like to improve that, long-term, towards a funded level of 100%. However, we have been able to improve our funded level over the last several years without increasing the contribution rates received from the school district and members. Additionally, we have been able to lower the discount rate from 8.0% to 7.6% over the last three fiscal years.
We are currently underweight to safe assets with a higher than normal allocation to cash–we have an expectation that interest rates could rise.
KM: Can you tell me about your career path to become the CIO of a public fund?
CH: I grew up in Mesquite, Texas, and graduated from a small liberal arts school called Benedictine College in Atchison, Kansas in 1987. I graduated from the University of Notre Dame with an MBA in 1989. Following graduation, I went to work at Ernst & Young as a consultant in the firm’s national cash management practice, based in Kansas City, Missouri. I primarily consulted with corporate clients and financial institutions and was able to develop solid analytical and presentation skills working in that area. From there, I moved to a job at the Johnson County Government in Kansas, which had a $300 million investment portfolio—it was my first exposure to managing money. After that, I went to the Missouri State Treasurer’s Office in 1996, where I managed its $3.5 billion fixed-income portfolio. I worked there until 1999, when I moved to my current position.
KM: What did these early jobs teach you?
CH: I had no portfolio management experience when I initially moved from Ernst &Young to Johnson County. However, sometimes out of necessity, a job with a public entity often gives a young person high level exposure and opportunities at an early age. I was able to take advantage of my opportunities at both Johnson County and the Missouri State Treasurer’s Office to grow quickly as an investment professional.
KM: What do you get out of being a public fund manager (versus a lucrative private gig)?
CH: From a professional standpoint, the very large portfolio [that I currently manage] gives our team access to some of the best investment talent in the world. That keeps us intellectually challenged every day. On a more personal level, managing the Systems’ assets affects people’s lives—there are now 260,000 members in our pension system. Working to help Missouri’s educators retire is a very meaningful and enjoyable part of what we do.
KM: How do you characterize your investment philosophy?
CH: At PSRS/PEERS, we have a strong governance process that has been established over a long period of time by a dedicated board. The board has delegated a significant portion of the investment decision-making to staff, allowing our System to be more timely and flexible. We have tried to utilize our core strengths of a strong governance process, a long time horizon and operational independence to develop our investment philosophy:
KM: What has been the best experience in your career?
CH: We really started to develop a long-term investment program at PSRS/PEERS in the early 2000s. At that time, the PSRS/PEERS fund was allocated solely to stocks and bonds. We started the process by spending quite a bit of time educating the board, especially on private equity, real estate and hedge funds. It took almost 10 years to get fully invested in those categories, but the result of that work has been strong risk-adjusted returns. The systems’ risk level as measured by standard deviation over the last 5 years was 3.9; the median level was 4.5.
KM: What has been the worst experience in your career?
CH: The most difficult experience was definitely the financial crisis of 2007 and 2008. Each day, we were faced with a new challenge as we tried to determine how the crisis would affect our portfolio. We were also worried about external service providers and concerned about our members being stressed about their retirement assets. We learned a great deal through the crisis and were very proud that our team, board and governance process held up very strongly. Despite the circumstances, our ability to not panic and focus long-term resulted in not only our Systems’ survival but our success following the crisis.
KM: In what part of the industry have you witnessed the most change?
CH: Perhaps the biggest change is the difference in asset allocations from institutional investors. In 1999, most institutions had similar portfolios based on a traditional 60/40 asset allocation. Since that time, we’ve seen the advancement of the alternative asset classes, the risk- parity concept, alternative betas, etc. It now seems like each institutional investor has an asset allocation that is unique to its specific circumstances.
Working to help Missouri’s educators retire is a very meaningful part of what we do.
KM: What aspect of the industry would you most like to see changed and why?
CH: I’d like to see a greater alignment of fees with private equity managers. There’s been a lot of movement with both hedge funds and public market managers, but fees have not really moved in private equity because returns have been strong. Fee sharing is probably not in complete alignment—I expect to see more movement in that area.
KM: How many managers and consultants do you have?
CH: PSRS/PEERS currently has four consultants, approximately 25 managers in public markets and about 125 managers in private markets. The 125 in privates are actually real estate or private equity General Partnerships. Significant due diligence on the front end but then not as much ongoing due diligence. We also rely on our external consultants to help in the private market due diligence work.
KM: Do you prefer active or passive management?
CH: We’ve seen a lot of institutions move to passive management, which has outperformed active management in the last few years. However, we remain bullish on active management in the current market cycle. We do believe that good manager selection and thoughtfully constructed portfolio composites can generate alpha.
KM: It’s been more than 10 years since you decided to seriously invest in real estate. How is that going?
CH: We’ve been very happy with the returns in our real estate portfolio—our seven-year annualized return thru June 30, 2018 is 11.3%. We currently have 7.5%, or $3.3 billion, of PSRS/PEERS total assets invested in real estate. We are a little overweight to core real estate, which are fully leased, fully developed properties, including industrial, office, multifamily and retail. Approximately 40% of our real estate allocation is in more value-add real estate.
It now seems like each institutional investor has an asset allocation that is unique to its specific circumstances.
KM: Are you married and do you have children?
CH: My wife is originally from Atchison, Kansas, and we live in Jefferson City, Missouri. Jefferson City is a relatively small state capital with a population of about 50,000 people. We have four boys, ages 18, 20, 23 and 25. Two are in college and two are starting their careers.
KM: Do you have any hobbies?
CH: I coached all of my kids in basketball while they were growing up. Now that our last son has gone to college, my wife and I will start traveling more. We will spend a lot of time traveling to Notre Dame football games, where our youngest son goes to school and to Lake Forest College in Illinois to watch our second youngest play basketball.
KM: What are you reading, and what’s on your to-read list?
CH: The entire management team at PSRS/PEERS just read From Good to Great by Jim Collins. A manager just sent me the book Adaptive Markets by Andrew Lowe, which I am looking forward to reading.