Following the 2008 global financial crisis, Palmer said staff worked to better diversify the system’s portfolio. In recent years, the focus has been on increasing risk while maintaining a high Sharpe ratio, a measure of risk-adjusted return, Palmer added.
“It allowed us to become a bit more efficient at generating returns with the same level of risk,” he said.
The system’s five-year Sharpe ratio was 1.3 as of March 31, ranking in the fifth percentile among a peer group of other public pension plans, according to data from its investment consultant, Meketa Investment Group.
Mr Palmer said the pension fund, like other institutional defined benefit plans, has critics who say it should cut the fees it pays by setting up a more passive portfolio of 60% of stocks and 40% bonds.
Referring to the “mirror crowd”, Mr Palmer said critics point to the past decade of strong stock market returns to back up their argument.
“If we had known 10 years ago that the S&P would rise 15% every year, we would have,” Palmer said. “But we thought it would be up 8% and it’s phenomenally better than that, which makes it harder for him to do it again in the future.”
He said many investors and critics who have done well in the stock market over the past decade have stopped paying attention to the risk side. “They just like to enjoy the strong returns and not pay attention to the risk they’re taking to get it,” Palmer said.
Martin Noven, executive director of the pension fund which joined the pension system in July 2021, said there is also an active lobbying apparatus that wants pension assets moved away from defined benefit schemes and towards schemes. defined contribution where there is more money to be made.
“DB plans suck up a lot of investment assets which, if it were retail investments or 401(k) type plans, there is a lot of money to be made from the industry and there is hard to fight against the industry,” Noven said. .
He added: “By having a much more diversified portfolio with uncorrelated asset classes, when you have something like this year where in a 60/40 portfolio when the 60s and 40s go down, it shows that yes, ( the 60/40 portfolio) works in many markets, but for a sophisticated $70 billion investor, that would be totally inappropriate.”
Mr Palmer now has 40 people on his investment team, up from 22 when he joined the system in 2015. In an effort to flatten the pension system’s cost curve, the team now manages around 10 in-house billion in assets on the public side and about $2 billion in co-investments on the private side, Palmer said, up from zero when he started.