Institutional Allocator Managing Editor Leslie Kramer spoke recently with Robert “Vince” Smith, chief investment officer of the New Mexico State Investment Council (NMSIC), a sovereign wealth fund, based in Santa Fe, NM, with a $24 billion permanent endowment. Smith shared his career trajectory leading to his current job, his passion for his work, the Council’s investment style, and which ebooks he listens to on his ride to and from work.
IA: Tell us about your career path. What led you to your current role with NMSIC?
Smith: I was educated in finance and economics at Montana State University in the 1980s, specifically pursuing entry into the public fund world. Weird as it might sound to some, while my classmates dreamt of being CEOs of Fortune 500 companies or high-stakes entrepreneurs, I wanted to invest public money. The late 1960s through the early 1980s were awful for public funds, and I wanted to be involved in making them better; I could not be more pleased to have gotten my wish!
I spent ten years from the late 1980s through the late 1990s as an investment analyst and then portfolio manager at the Montana Board of Investments, a state agency that manages all of the investible assets for the State of Montana, including both pension and sovereign wealth mandates.
In 1997, I moved to the Employees Retirement System of Texas and spent nine years there, from the late 1990s through the mid-2000s. I came in as an equities portfolio manager and was promoted to asset-class director of international equities. We managed most of the assets in-house, which was a real treat, through the dot-com market crash of 2000-2002.
My first chief investment officer assignment was with the Kansas Public Employees Retirement System, for four years, from 2006-2010, a period which featured the Great Financial Crisis (GFC). In 2010, I moved to the New Mexico State Investment Council as CIO, to be part of a wholesale restructuring and rebuilding of the state’s sovereign wealth fund. The NMSIC had gone through quite a rough patch in the GFC, and there was strong appetite for a more institutional program and better investment management, helmed by someone with the kind and level of experience and track record that I had.
IA: What is the asset allocation breakdown of the NMSIC fund?
20% Domestic Public Equity
20% Foreign Public Equity
10% Core Bonds
12% Real Estate
12% Real Assets (ex-Real Estate)
11% Private Equity
IA: How do you describe or characterize the NMSIC’s investment philosophy?
Smith: My investment team and I employ a macro-driven, top-down investment process, which emphasizes macroeconomic analysis, market valuations, broad investment themes/strategies and asset allocation. Abundant academic research, extensive empirical evidence, and our long market experience makes it clear to us that the changing condition of the global economy, valuation levels of markets and long-term fundamental investment trends—and our exposures to these things through asset allocation—by far drive the level and variability of our long-term investment returns. So, we focus our efforts on those things. The team expends extensive effort constructing asset class structures and filling those structures with high-quality managers and investments, but do so within a macro and strategic framework designed to have them ‘fishing in the most productive ponds’ at any given point in the economic and investment cycle.
IA: Which consultants do you use for the various asset classes?
Smith: We use RVK as general consultant and have a great team from them, led by Marcia Beard and Matthias Bauer. We use AON/Townsend (formerly the ) for real estate and some real asset consulting, and Pavilion (formerly LP Capital) for private equity and some real asset consulting. Jack Koch and Seth Marcus lead Townsend’s efforts with respect to our account, and Allen Waldrop and Richard Pugmire lead Pavilion’s efforts. We’ve been very fortunate to have these firms and all of these pros work with us. For all of the advantages we feel our investment process gives us, the flip side of the coin is that it takes seasoned, skilled pros to run it for maximum benefits.
IA: What has been the best experience in your career?
Smith: Oh, for certain, my time here in New Mexico! It has been by far the most professionally rewarding, providing investment leadership in the restructuring and rebuilding of the sovereign wealth fund here and the most personally rewarding, in terms of being part of the broad sovereign wealth fund mission. I thoroughly enjoy the people I’m fortunate enough to work with here. And I could not be more pleased to be back to the mountains–Santa Fe is beautiful, and it’s just the other end of the Rocky Mountains from my Montana roots.
IA: What was the worst experience in your career?
Smith: There have been challenges at times, over thirty one years, but I can’t think of a one where I did not learn something important or grow as an investor—or both.
The GFC was gut-wrenching. The news coming out of Washington DC, New York City and other capitols and financial centers around the world—and the response of the global financial markets—was something I’ll never forget. The top three things I learned from the GFC were liquidity, liquidity, and liquidity. I was CIO in Kansas at the time. We were able to use the futures markets to rebalance our stock and bond exposures, and we liquidated some of our significant investments in Treasuries to help pay benefits. Much of the rest of the Treasuries were liquidated to take advantage of the carnage in the credit and real estate markets. It seemed like every day that I went into the office from the fall of 2007 through the end of 2009, the thing mostly on my mind was liquidity—where would it come from and where was the greatest need for its use.
IA: In what part of the industry have you witnessed the most change?
Smith: Asset allocations at public funds have come a long way. When I came into the business, it was all about stocks and bonds. Price-to-earnings ratios on stocks were reasonable and long-term expected returns on stocks were double-digits. Ten-year government bond rates were eight-to-nine percent. ‘60/40’ would easily make an eight percent bogey, and more. The dot.com crash of 2000-2002 (an approximate 50% drop in the equity market) was a huge wake-up call to the industry regarding the publicly traded equity risk embedded in our portfolios; and en masse, funds moved from an average of 5-7% in allocations to assets other than stocks/bonds/cash to 10-12%. Less than a decade later, the GFC again shocked the system (a 55%-plus drop in stocks) and funds again doubled their “alternatives” exposures to around 20-25%. Public funds as a group move very slowly with regard to such decisions, so that kind of move, industry-wide, has been significant.
IA: What aspect or element of the industry would you most like to see changed and why?
Smith: Fee structures for ‘alternatives,’ for certain. While the active management intensity of asset classes like real estate, private equity, real assets, private credit and so forth is higher than that required to manage publicly-traded assets, I feel fee structures have significant room to continue to right-size.
IA: How is overall “health” of the NMSIC fund?
Smith: Well, we’re a sovereign wealth fund, so we have no ‘funded status,’ per se. We do have an ‘intergenerational equity model,’ however, to measure the probability that the funds will at least maintain their purchasing power over time. Our large fund, which represents 75% of our assets, is fairly well in balance, with a good probability of being the same size or larger in real terms—inflation-adjusted terms—50 years from now. Our smaller fund (most of the rest of the assets), does not have as good of an outlook, however, and we are seeking greater inflows from the state into the fund to help get it on better footing.
IA: How about your personal life? Do you have a family and what do you like to do in your free time?
Smith: I‘m married to my high-school sweetheart, and we are empty-nesters of three sons and a daughter. We like to travel when we can get away from our respective professional obligations, and like to spend time outdoors in northern New Mexico, Colorado and Utah, when only a weekend or a long weekend is available. We live on some small acreage and maintain a fruit orchard of four types of fruit and eleven varieties, and a variety of berry rows, just for the challenge of doing so against the Santa Fe southern Rockies mountain weather. I’m a big [Amazon] Audible fan, so I normally have three or four things in-progress for the 20 minute drive into work and home each day. Malcolm Gladwell’s Outliers and David and Goliath: Underdogs, Misfits, and the Art of Battling Giants are currently in my queue, along with the recently-completed Richard Thayler’s Misbehaving: The Making of Behavioral Economics and Daniel Kahneman’s Thinking, Fast and Slow. Recently, Mark Manson’s The Subtle Art of Not Giving a F*ck: A Counterintuitive Approach to Living a Good Life showed up in my queue, courtesy of my spouse who said, in good humor, my list needed lightening up some.