This week, reporter Kaitlyn Mitchell spoke with SoCal native Jeremy Wolfson, chief investment officer (CIO) of the $15 billion Los Angeles Water & Power Employees’ Retirement Plan about his non-linear path to becoming a public fund CIO (helped by an extreme aversion to blood—more on that later), his toughest times as an investor and his uber-positive outlook for his fund—which is doing exceptionally well compared to a majority of the nation’s public pension plans.
KM: What is your fund’s funded status?
JW: We have one of the best-funded plans in the nation, at 93.1% as of June 30, 2018. A Milliman study found that public pension plan funding levels as of June 30, 2017 were estimated to be 70.7% on average.
KM: What is your institutions’ asset allocation breakdown?
JW: We have always maintained our discipline of portfolio diversification. We have a mix of traditional asset classes along with exposure to non-traditional or alternative asset classes, such as private equity, real estate, hedge funds, etc. Our largest exposure is to publicly-traded global equity and global fixed income, at 48% and 25%, respectively. Our target allocation to alternatives range from 8% for private equity and real estate to 5% for our hedge funds and real return portfolios. Each sub-asset class is further diversified into various investment strategies such as a dedicated international small-cap equity mandate, domestic large-cap growth equity, bank loans, global credit, etcetera.
Recently for example, our board approved a new international small-cap equity mandate to help produce additional alpha in the portfolio, and add an additional layer of diversification within global equity to help maintain the overall diversification across the portfolio. We undergo asset class structural reviews, every couple of years, through a methodical and structured process. We previously had a low-volatility S&P 500 options strategy that made up five percent of our portfolio; we made the decision to re-allocate that five percent into a hedge fund-of-one portfolio, structuring it in a way that attempts to be market-neutral, while increasing diversification and reducing equity beta exposure. The hedge fund allocation was almost fully funded this year.
We have one of the best-funded plans in the nation, at 93.1%
KM: What is your role at the institution?
JW: I currently lead the investment team responsible for investing and monitoring the Plan’s portfolio. My staff may disagree, but I like to think of myself as the head coach of a high performance team. I have been very lucky to work with, hire, develop and collaborate with a dedicated team of investment professionals that take their fiduciary responsibility very seriously. Knowing that they have very important jobs that impact peoples’ lives by protecting the retirement income of thousands of employees is a fulfilling experience. Given that backdrop, we work hard to ensure that we create a forward path of long-term risk-adjusted returns that comply with our Board’s risk profile and attempt to maintain our Plan’s assets into perpetuity.
I’ve tried to build a cohesive and collaborative team. I have investment officers responsible for each asset class, an analyst, and two senior investment officers—one responsible for global, private and one responsible for global, public markets. We run an efficient operation.
KM: Tell me about your career path—How does one become the CIO of a city pension fund?
JW: I was born and raised in Los Angeles. I attended a local university, California State University, Northridge, with a degree in finance, and later earned my MBA at Pepperdine University in Malibu. I’ve always had a passion for finance from a young age, somewhat driven by a successful finance executive in my family, who started his career as a real estate syndicator in the 1970s and went on to start his own high net worth bank; also somewhat driven by my aversion to blood—I knew that I would never be a successful doctor. I have some well-known and respected doctors in my family, including my grandfather’s first cousin Dr. Robert Kerlan, co-founder of a Los Angeles orthopedic group that treats the Rams, Lakers and Kings professional sports teams. There are also prominent attorneys in my family, who can count various celebrities as clients however, I was never interested in either of those career paths.
I took a somewhat non-linear path to my current role as CIO for a public pension plan. I started my professional investment career trading bonds on an institutional fixed-income trading floor for Bank of America. I then transitioned to the ‘buy side’ of Wall Street when I took on the discretionary role of investing the working capital and longer term reserves for the City of Los Angeles Treasurer’s Office. I led a great team of investment professionals and helped build out their platform for two years, before transferring to one of the City’s three pension plans. I’ve since been at the Water & Power Employees’ Retirement Plan for over a decade. It’s very rewarding work, and I really do love what I do, which makes coming into work every day and giving 150% so much more enjoyable.
KM: How do you characterize your investment philosophy?
JW: We have a strong sense of pride and a vested interest in our pension plan that has existed for over 75 years, and will continue as a going concern well beyond our lifetimes. As mentioned earlier, our number-one priority is our fiduciary duty to our plan participants, both active members and retirees. Our retirees should be able to count on a regular, consistent and safe retirement income, throughout their lives, and our active members should be able to count on a stable retirement income when the time arrives for them to move on to greener pastures. To ensure this stability, it requires us to focus on long-term, risk-adjusted returns to produce cash flow without introducing a large amount of risk into the portfolio. We attempt to achieve this with reasonable and calculated amounts of volatility and risk across various strategies and asset classes, consistently over multiple market cycles.
We also focus on providing consistent net-of-fee performance while keeping the Plan’s costs at a minimum. Every dollar spent is important to us, so we’ve been able to negotiate one of the lowest cost structures compared to our peers and maintain very healthy funding levels. We are long-term strategic investors with a passionate and capable investment staff that fully vets proposed investment recommendations, in light of these principles. The Retirement Board is very supportive and very much engaged, providing the necessary leadership and decision-making acumen to propel the Plan forward through various economic and market environments.
KM: What has been the best experience in your career?
JW: Making the choice to pursue a career in public service while continuing to pursue my passion for investing, has been one of the best experiences of my career. The combination of leading a high performance investment team, working with some of the smartest people I’ve known, the ability to have met and work with such dedicated constituents on my Board, the hard working active members of the DWP, and the well-deserved retirees of our Plan, have truly given me a sense of purpose. It’s the drive that keeps me engaged and passionate about the job. I love the process and intellectual challenges of investing a large portfolio of global assets and collaborating with the most dynamic people in the industry, and I feel we are doing very important work that has a real impact on the lives of thousands of hard working and retired DWP employees. That is a very satisfying feeling.
KM: What was the worst experience in your career?
JW: One of the most challenging experiences was living through the global financial crisis and working very diligently to ensure a long-term positive outcome. We were fortunate to have had a very well-diversified portfolio and somewhat of a defensive posture going into the crisis. This was a function of our disciplined approach to investing and regularly evaluating the portfolio structure where we saw opportunities. Although we took losses like everyone else, our downside market capture was lower than most of our peers, and since we were in the early stages of investing our alternative asset classes—such as private equity and real estate, at the time—we were able to take advantage of opportunities coming out of the crisis with dry powder and the ability to deploy capital in a distressed environment. This allowed the Plan to recover quickly and outperform without taking on additional risk.
For example, our current real estate portfolio has diverse exposures to all three risk categories, including 70% long-term allocated to core, 20% to value-add and 10% to opportunistic. These exposures, over time, should produce accretive returns with the appreciation of assets, as they stabilize and produce a consistent cash flow.
KM: In what part of the industry have you witnessed the most change?
JW: I’ve seen a lot of change over the past decade. From a reduction in capital market assumptions and expected returns, to changes in governance across various public plans, increased levels of transparency, increased access to global markets, cost-containment strategies, rotation between risk-on/risk-off investing, to name a few. Some of the changes have been driven by changes in the environment, some by new technology, others by disruptive forces, but in the long-run, the one constant in life is change. Being flexible and having the ability to be adaptive to these changes enables the Plan to choose the best courses of action that are accretive to the Plan, its goals and objectives, and ultimately to the benefit of all plan participants. This should always be top of mind when evaluating and developing new recommendations or how to appropriately address necessary changes.
KM: What aspect of the industry would you most like to see changed and why?
JW: Public plans have historically been challenged with resource limitations. This is typically a function of cost, governance restrictions, size of the plan, etc. So long as there are economies of scale that can be achieved by allocating internal resources, I think there is an opportunity for a large value-add by investing in our people, hiring and retaining the best talent, and having a team of investment professionals that have a vested interest and fiduciary responsibility to provide a best-in-class program to ensure the stability of the pension portfolio. This may require creative thinking to enable the best use of existing resources, or ensuring effective governance to increase the level of investment talent, in-house technology, or perhaps internally managed investments for various investment strategies that can be replicated at a lower cost. This, of course, assumes the platform can be built to support it, and that a long term vision is shared among key decision makers, constituents, and stakeholders. I’ve seen this trending in a positive direction over time across plans, and I would like to see this continue to grow since it is a win/win for the industry but more importantly the pension plans and ultimately their beneficiaries, of which I am selfishly one of them.
KM: Are you married?
JW: I am currently married to my lovely wife Sophia. We’re approaching our ten-year wedding anniversary in 2019, which is a great milestone.
KM: What’s on your summer reading list?
JW: I’m currently finishing up Origin by Dan Brown, and then it’s back to business related books. Perhaps Adaptive Markets by Andrew Lo, which has been on my radar recently.
KM: Where’s your next vacation to?
JW: We love to travel, but have been limited by our work schedules. We toured France two years ago, and Italy is next on our travel agenda. I have a stepsister who lives in Bologna, so we’re looking forward to visiting her and her husband, while enjoying the beautiful sights across the country.