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JOI: But PERSI’s strategy does seem conservative in the
sense that it seems to be strongly opposed to making
spur-of-the-moment decisions or chasing returns.
Maynard: That is correct. The traditional investment approaches
and modern portfolio theory were built and designed to
work over five- to 15-year periods. That means: Don’t make
quick decisions. Stick to the plan. Expect interim volatility.
If all of a sudden you find yourself in a situation where
you can’t lose a fair amount on a year-to-year basis, you
can’t take the volatility, or you find that your return needs
are more than the market can bear—like endowments,
which have real return needs oftentimes of 7 or 8 or 9 percent
above inflation—then modern portfolio theory gives
you issues. But we don’t have those problems.
JOI: What are the pitfalls for pension fund investing?
What trips up pension fund managers?
Maynard: Switching approaches too often, or chasing
the most recent good idea. Generally, if you look at the
most successful funds over the years, you’ll find that the
You use indexes for a number of different reasons.
First of all, it’s an easy way to see what the market return
would be if you have active management.
ones that have been the most successful stick to the same
investment approach over decades.
And sometimes they’ll do completely different things.
If you look at the Washington State Investment Board,
it’s a stunningly good fund. They do huge amounts of
private equity and always have, much more than we do—
something like 25 percent. Over time, we’ll all get about
the same return. The South Dakota Retirement System
has one of the best investment records in the world over
the last 35 years because they stuck to a certain type of
investment. Whatever investment approach you have,
you need to stick with it in good times and bad—and particularly
the bad times. The market always takes longer to
go through a cycle than you think it will—oftentimes just
beyond that three years that’s the average tenure of the
CIO, or average of five years for a board member. When
you have turnover of staff, they get rid of things that were
put in place by a previous group. Then they leave and
someone else comes in. Those are the systems—the ones
without those traditions—that can get in trouble.
In large measure, if you look at a period of time over years
and years, we all kind of end up around the same place, just
at different times. There are different routes to investing, and
you’ve got to pick one and stick with it. For us, because our
liabilities are under control, we stick to basic, market-oriented
investments—we don’t have to try for anything bigger.
JOI: How do you use index-based investment strategies
in the fund?
Maynard: In all of our areas, we have basic, cap-weighted
indices, and that tends to be about a third of our fund.
JOI: Why is cap-weighted the way to go?
Maynard: You use indexes for a number of different reasons.
First of all, it’s an easy way to see what the market
return would be if you have active management. It is an easy
alternative to the active managers or any other approach. It
definitely represents the money-weighted opinion of value.
It gives you the fewest transaction costs: Cap-weighted
automatically rebalances. We’re like big tuna being carved
up like sashimi out there when we go out there and try and
trade, given the high-frequency traders and everything. It
includes pretty much all stocks. You are not leaving some
stocks out like you would with a fundamentally weighted
index. It includes all stocks and all styles. And it may or may
not be the best way to get return for the risk involved, however
you measure risk.
When you hear people talking about different sorts of
indices, like fundamentally weighted indices, their argument
is it makes you more money with less risk. That may or may
not be true—I’m agnostic on that. But clearly other forms of
indices beyond cap weighting don’t address all the other reasons
you use an index in a broad portfolio—easy transaction,
get money in and out, use it to rebalance for other things,
good risk control, easy alternative, all of that stuff.
JOI: How do you evaluate an active manager?
Maynard: We evaluate whether or not they are being
true to their style and with the same sort of resources. If
they are, our basic policy is that we don’t fire for nearterm
performance—and by “near term,” I mean three to
five years. Poor near-term performance can be an indicator
of something going wrong, either that something is
going wrong within the firm or that it is a different firm
than you thought you had. But if you look at them and
they are the same firm, following the same style, picking
Figure 1
PERSI Asset Allocation
December 2012
Source: Public Employee Retirement System of Idaho
www.journalofindexes.com March / April 2013 23