Arleen Jacobius of Pensions & Investments
reports CalSTRS’ Ailman to retire June 30, tells P&I his focus will be climate change, energy transition:
Christopher Ailman,
chief investment officer of the nation's second-largest public pension
fund, is retiring on June 30 with plans to stay on as an adviser through
the end of the year to ease the transition after a successor is named,
he told Pensions & Investments in an interview.
An industry leader who has long pressed investors to take into account the investment risks of climate change and has defended the importance of defined benefit plans, Ailman has served as CIO of the $304.9 billion California State Teachers' Retirement System,
West Sacramento, since 2000. Starting July 1, he will transition to an
adviser to the new CIO, who is expected to be in place by then, for the
remainder of 2024.
News of his retirement was officially announced Jan. 11 during CalSTRS' investment committee meeting.
CalSTRS' board will
form a committee to immediately begin a global search for a new CIO, he
said. The board will not be hiring an executive search firm but instead
will work with the state human resources department to find his
successor.
After a 38-year career working in the public pension fund arena, Ailman, 65, told P&I that he is ready to begin winding down his career. "It's time to slow down. ... I'm starting to empty out my office," he said.
But for Ailman, slowing down is
relative. While he won't be in the building after June 30, Ailman said
he will be "on call" to "smoothly pass the baton," and in 2025 he'll
embark on his encore career with a long list of projects.
The search for a successor means that
CalSTRS will be competing for talent with the nation's largest public
pension plan, the $470.2 billion California Public Employees' Retirement System, Sacramento, which last year launched its third search for a new chief investment officer in five years. CalPERS CIO Nicole Musicco left in September, returning to Toronto for family reasons only 18 months into her tenure.
Although Ailman made the formal
announcement at the Jan 11 investment committee meeting, the board has
been participating in a succession planning process that started two
years ago around the time former CalSTRS CEO Jack Ehnes was close to
retiring, Ailman said.
The search process is open to all qualified executives, internal and external.
"We have strong internal candidates," said Ailman, who heads an investment team of more than 200.
After the transition, Ailman, an avid
cyclist and grandfather of two, said he won't entirely stepping away
from the industry. In 2025, he said he plans embark on his encore, a
part-time career serving on boards and advising money managers and asset
owners on the global energy transition and the path to net zero —
topics he has been passionate about for years. He also intends to
continue working as a university guest lecturer. He has been a guest
lecturer for a Harvard Business School course on sustainability and for
Boston College's MBA program. And he said he hopes to write more
editorials on topics impacting the industry, including the energy
transition.
A veteran of market cycles
Ailman is one of the
longest-tenured CIOs in the world, taking over the post in October 2000
when the fund was valued at $109.6 billion. During his tenure, Ailman
guided the pension fund through the internet bubble crisis, 2000-2002;
the economic effects of the terrorist attacks on New York's World Trade
Center on Sept. 11, 2001; and the global financial crisis in 2008.
CalSTRS posted a 6.3% gain for the
fiscal year ended June 30 and 8.7% for the 10 years ended June 30. By
comparison, CalPERS, in which Ailman is a beneficiary, earned a total
return of 5.8% for the fiscal year and an annualized 7.1% for the 10
years ended June 30.
He also formed an innovation and risk
team around 2006 and was instrumental in the board's adoption of two
new asset classes: inflation sensitive and risk-mitigating strategies.
"The first big idea out of the
innovation team is that Steven developed risk-mitigating strategies,"
Ailman said, referring to Steven Tong, CalSTRS' director of
risk-mitigating strategies who helms the team. "At that point interest
rates were diving toward zero. … We needed something that would give
diversification when growth failed."
CalSTRS had 8.8% invested in
risk-mitigating strategies and 6.1% in its inflation-sensitive portfolio
as of June 30, with targets of 10% and 7%, respectively.
Risk-mitigating strategies returned -4.19%, underperforming its -1.84%
benchmark in the one year and earned 3.51%, identical to its benchmark,
for the three years ended June 30.
CalSTRS' investment team developed
the inflation-risk portfolio after the 2008 global financial crisis,
Ailman said. However, the current allocation to inflation-sensitive
strategies isn't enough to provide the pension fund inflation
protection, he said.
Pension fund officials will have to devise a way to increase that allocation without cutting into returns, Ailman said.
Continued push on climate
Ailman also helped the board adopt as
well as implement a sustainable investment strategy, which includes the
long-term goal of CalSTRS' portfolio achieving net-zero greenhouse gas
emissions by 2050 or sooner.
When he's not working
on boards such as that of the 300 Club, a group of leading investment
professionals, and serving as co-chair of Milken Institute's Global
Capital Markets Advisory Council, he plans to focus on climate change
and the energy transition, he said.
"Climate change and the energy transition will dominate the landscape for the next 20 years. It has to," Ailman said.
His peers and the money management industry aren't paying enough attention to it, he said.
While some money managers are focused and devoted to the topic, there also is some greenwashing, he said.
"We need better data from companies
and better analysis of that data," Ailman said. "It's a key source of
alpha and a key source of risk."
Even as Ailman prepares to step down from leading CalSTRS' investment team, the pension fund is evolving.
At the investment committee meeting,
members are scheduled to consider for the first time adding 10% leverage
to the entire fund on a temporary basis to fulfill cash flow needs in
circumstances when it is disadvantageous to sell assets. CalPERS already
employs 5% total fund leverage.
On Sunday, I posted a comment on LinkedIn criticizing Zero Hedge (or Zero Edge as I like to call them) for going after CalSTRS' decision to increase its leverage up to 10%:
I got close to 35,000 views and many people still do not understand the intelligent use of leverage which is one reason why Canada's large pension funds have delivered great results over the long run (one reason but independent governance and solid compensation to attract and retain talent to manage more assets internally is main reason).
Also, up to 10% leverage doesn't mean CalSTRS will actually go up to 10% or $30 billion in leverage, it just means it has the backing of the board if it ever needs to do so.
I've been covering public pension funds for a long time and the amount of misinformation and disinformation is really bad nowadays, probably the worst I ever seen.
Also, while CalSTRS is a leader in sustainable investing, it doesn't believe in divesting from fossil fuels.
Anyway, back to CalSTRS' CIO Chris Ailman.
He's definitely a 'veteran' who has seen it all, he's also a nice and smart guy who communicates his thoughts effectively.
He'll be stepping down from his duties at CalSTRS on June 30th but I wouldn't be surprised if he takes over as CIO of CalPERS.
Yes, I'm speculating, have no idea what his next endeavors will be but in my opinion, he's a great fit and knows all the politics in the great state of California.
At 65 years young, he's no spring chicken but he still has great years ahead of him.
Another project I'd love to see a guy like Chris embark on is writing a really good book on pension funds encapsulating his experience at CalSTRS.
I'd love to see the same from Ziad Hindo who recently departed from his position as CIO at Ontario Teachers'. He'd be an all-star replacement for Chris at CalSTRS and has ten good years if not more left in him.
Again, I'm speculating and giving you my honest opinions, have no idea what Ziad is up to, hope he's relaxing somewhere warm and tropical.
Being the CIO of a major pension fund isn't easy, the demands are non stop but Chris Ailman somehow made it look easy.
But he worked tirelessly to bring CalSTRS portfolio to where it is and has a great team backing him up.
Yes, they have great internal candidates there too who can take over the top investment job, people like Steven Tong, CalSTRS' director of
risk-mitigating strategies and others as well.
Speaking of risk-mitigation strategies, I looked at CalSTRS Fiscal 2023 Annual Report here and noticed that as of June 30th, 2023, they had 8,8% invested there and 6.1% in inflation sensitive assets:
The article above notes:
CalSTRS had 8.8% invested in
risk-mitigating strategies and 6.1% in its inflation-sensitive portfolio
as of June 30, with targets of 10% and 7%, respectively.
Risk-mitigating strategies returned -4.19%, underperforming its -1.84%
benchmark in the one year and earned 3.51%, identical to its benchmark,
for the three years ended June 30.
CalSTRS' investment team developed
the inflation-risk portfolio after the 2008 global financial crisis,
Ailman said. However, the current allocation to inflation-sensitive
strategies isn't enough to provide the pension fund inflation
protection, he said.
I agree, they need to double their exposure to inflation sensitive assets like include infrastructure, commodities, U.S. Treasury inflation protected securities, timberland and agriculture.
In terms of risk-mitigating strategies, I read this on page 109 of the financial report:
For the fiscal year ended June 30, 2023, the Risk Mitigating
Strategies (RMS) Portfolio had total assets of $27.8 billion,
representing 8.8% of the total fund. The RMS Portfolio was
established in July 2016, with a long-term target allocation
of 9.0% of the Total Fund. In November 2019, the Teachers’
Retirement Board Investment Committee approved an
increase to the long-term strategic allocation to RMS from
9% to 10%.
The RMS Portfolio invests in strategies that further diversify
CalSTRS’ overall investment portfolio, primarily oursignificant equity exposure. These strategies include trend
following, long-duration U.S. Treasuries, global macro and
systematic risk premia. Rather than focusing on achieving a
specific return objective, the RMS Portfolio is expected to
help the total fund achieve its return objective by protecting
capital during equity downturns or volatile periods.
The RMS Portfolio had a -4.3% one-year return net of fees
for the fiscal year ended June 30, 2023, underperforming its
policy benchmark by 253 basis points.
The underperformance was driven by negative relative
performance from global macro and trend following. This
was partially offset by positive relative performance from
long-duration U.S. Treasuries, as well as positive absolute
and relative performance from systematic risk premia. The
long-term returns for the RMS Portfolio are expected to be
positive and exhibit low correlation to equity markets.
Now, I haven't been in the hedge fund game in a while but I still track them closely and it doesn't surprise me that trend following and macro funds got hit last year but some did a lot better than others.
I'd love to sit down with Steven Tong, CalSTRS' director of
risk-mitigating strategies to see exactly which alpha funds they're investing in and give him my unbiased advice (used to invest in L/S Equity, CTAs, global macro funds and short sellers).
Of course, the real value in that portfolio will come when the sh*t hits the fan later this year, and that's when you need that portfolio to kick into high gear and buffer (mitigate) the massive losses coming from the beta drag.
My fear is that a lot of sophisticated pension funds don't have a clue of what they're doing with their liquid alpha (hedge funds / risk mitigation) portfolios and that will come back to haunt them.
"Oh stop being an arrogant Monday morning quarterback Leo, as Ray Dalio once asked you,: what's your track record?"
Lately, it's good, damn good but I'm waiting to hit that beta wall later this year to prove to myself that I can continue delivering alpha in all market environments.
Alright, let me just end this comment by wishing him all the best as he slowly retires from CalSTRS later this year.
His timing, as always, is impeccable (just kidding he's been bearish for a while now).
Chris, if you ever do write a book, let Gordon Fyfe write the forward and I'll review it.
Below, California State Teachers' Retirement System Chief Investment Officer Chris Ailman is stepping down in June after almost a quarter century directing investments for the second-largest US public pension fund. The 65-year old says it's time to slow down. He speaks to Bloomberg's Romaine Bostick.
