Alternatives, Asset Allocation, Defined Benefit, Institutional Investors, Pension Funds, Private Equity, Public Funds

Asset Owner Profile: OHSERS’ CIO Majeed Seeks Right Perspective in Topsy-Turvy World

Farouki Majeed, chief investment officer of the School Employees Retirement System of Ohio (OHSERS), has been heading the investment team there for close to seven years. His route to that role has been a long one, including stints in Sri Lanka, Abu Dhabi, Minneapolis and Sacramento. In an interview with Institutional Allocator, Majeed shared his conviction that investors should stay away from products they don’t understand and be weary of leverage and implementation risk. He also revealed why he finds the work he does at OHSERS to be so rewarding.

Ranked in the bottom quartile of the public fund universe when Majeed arrived in 2012, OHSERS is now solidly in the top quartile. Maybe standing on his head while practicing yoga has given Majeed the unique perspective that was needed to run the $13.5 billion in assets under management pension fund.

Farouki Majeed, chief investment officer of the School Employees Retirement System of Ohio

IA: What is the School Employees Retirement System of Ohio’s Asset allocation breakdown? Which assets and how much in each category?

Majeed: U.S. Equity 22.5%; Non-U.S. Equity 22.5%; Private Equity 10.0%; Real Assets 15%; Fixed Income 20%; Multi Asset Strategies 10% (includes hedge funds).

IA:  Tell us about your career path. Where did you go to school and where have you worked since then?

Majeed: It’s a long story. I’ve been working as an investment officer with U.S public pension plans for 28 years in three different states. Currently, since July 2012, I am the chief investment officer here at the School Employees Retirement System of Ohio; it’s been one of my longest tenures. Prior to that, I was the senior investment officer at CalPERS [California Public Employees Retirement System] from 2007 to 2012, responsible for asset allocation and risk management. It was a challenging assignment, navigating through the period of the global financial crisis. Prior to that, I had, probably, my most interesting assignment, which was to start up an investment program for the pension fund for the Abu Dhabi Retirement Pensions and Benefit Fund. Not often do you get a chance to start up an investment program from scratch. It involved setting up investment policies, asset allocation and governance framework and hiring staff, selecting investment managers and deploying assets. The funds were in bank deposits initially and, at first, we invested all the assets 50/50 in global equities and global bonds and then gradually moved the portfolio to match the asset allocation targets, including other alternative assets such as real estate, private equity and hedge funds. I led the program for three-plus years and the fund went from 0% invested to a 100 % during that time.

Before that, in 2002, I was [hired as]deputy CIO at the Ohio Public Employees Retirement System, and I was chief investment officer for Orange County Employees Retirement System starting in 1997 for about five years. My career began at the Minneapolis Employees Retirement Fund in 1991.

In terms of education, I came to the U.S. in 1987 from Sri Lanka to attend Rutgers University in New Jersey, from 1987 to 1989, seeking an MBA. I have been in the U.S. since then. Back home, prior to coming to the U.S., I earned a degree in engineering from the University of Sri Lanka in 1979 and worked in engineering and finance for a while.  

IA: How do you describe/characterize your investment philosophy?

Majeed: My investment philosophy is to have a broad global long-term outlook, to be diversified across not only asset types but also across a variety of risks, to be well informed about market trends, have a rigorous investment process and risk management and to avoid big mistakes. Also, it is important to preserve capital and not invest in things you don’t understand and be weary of leverage and other types of implementation risks. I prefer to allocate our active risk and fee budgets to areas where we have greater confidence of outperforming, such as private equity and real assets, and to be more conservative in the public markets.

IA: What was the best experience in your career?

Majeed: My current job at OHSERS has been very rewarding. I was hired to implement change: to improve investment processes and performance. When I arrived here in 2012, the fund’s performance was below its policy benchmark and ranked in the bottom quartile in the public fund universe (Trust Universe Comparison Service). We have turned this around. As of March, fund returns exceed the benchmark for three, five and ten years, and we rank in the top quartile for three and five years.

I credit the whole investment team for the efforts we have put into improving our investment strategies, selection processes and risk management. Investment decisions are made by a staff committee of investment officers chaired by the CIO. We conduct a formal meeting for approvals that are also attended by executive, compliance, finance and legal staff. Investment memoranda are reviewed and opined on by the consultant. Our Board has delegated investment decisions, except policy, to a staff committee. This governance framework has been very helpful in implementing the changes that were needed.

Our private equity returns have improved and were ranked second among public plans for the ten years ending 2017 (American Investment Council). We changed our real estate strategy and have seen improvements in returns. We expanded the real assets class to include infrastructure, and we have developed an opportunistic investments portfolio that is now about 3% of assets.     

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

Majeed: I think active management in equites is quite challenged and is fundamentally affecting asset management firms because of their inability to consistently beat benchmarks. Our U.S. equity program is largely indexed in the large-cap space. ETFs have also upended active management. We observe private equity firms morphing into giant asset managers by extending into other areas. The scale of the some of the PE funds is staggering—one recently closed at $22 billion! We have a niche approach to private equity and invest mostly in middle- to small-market funds where value is added through business improvements and not financial engineering.

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

Majeed: I think the hedge fund industry is totally misaligned with the needs of investors. High fees and declining performance are a problem as well as transparency. We are campaigning for better alignment of fees and for hurdle rate in the performance fee calculation rather than zero at present. The industry is not so receptive since they still seem to have funds flowing in, however, we are adopting alternative strategies to reduce our fees. For example, we started a hedge fund replication portfolio using liquid index funds.  

IA What is your fund’s funded status?   

Majeed: OHSERS is about 72% funded.  Our board has been very much focused, over the past several years, on pension reform initiatives.  We have had two iterations of reform in the past five years: The first involved increasing retirement age and final average salary; the second one changed COLA increases for retirees from a fixed rate to an inflation-linked method with a cap, with a maximum limit for retirees.

IA: Are you married? Children?

Majeed: Yes. My wonderful wife, Yazmeen, and I have been married for 38 years, and we have two adult daughters who have their own careers and life. I have a daughter in Chicago, who works with a global company in the real estate business and a daughter in Washington D.C. who works in education. I feel blessed with my family.

IA: Do you have any pastimes? What is the last book you read? Next travel plans?

Majeed: I practice yoga, including standing on my head. It helps to see the world from a different perspective, upside down. I read a lot. Right now I am working on two books sitting on my desk: The Art of Thinking Clearly, by Rolf Dobelli and The Greatest Story Ever Told–So Far: Why Are We Here? by Lawrence M. Krauss.

I just returned from a visit to Sri Lanka. I have siblings there, and some extended family whom I visited. But I also saw elephants by the roadside on a trip and blue wales off the southern coast of Sri Lanka.

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