Episode Transcript
[00:00:00] Speaker A: I think that it's important for all of us, for every institution to have agency in every decision.
And maybe these capital letters, maybe the A should really be agency, that it forces institutional investors to be contextually thoughtful with every decision, recognizing that every decision has a relation to every other decision.
[00:00:29] Speaker B: Welcome to the Institutional Edge, a weekly podcast in partnership with Pensions and Investments. I'm your host, Angelo Calvello. In each 30 minute episode, I interview asset owners, the investment professionals deploying capital, who share insights on carefully curated topics. Occasionally, we feature brilliant minds from outside of our industry, driving the conversation forward. No fluff, no vendor pitches, no disguise marketing. Our goal is to challenge conventional thinking, elevate the conversation, and help you make smarter investment decisions. But always with a little edginess along the way.
Hi, everyone. Welcome to the show. I'm Angelo Calvello and today I'm talking TPA with my friend John Grable. John is the CIO at Los Angeles County Employee Retirement association, where he's responsible for the overall investment strategy, portfolio construction and manager selection for for Lecera's about $90 billion defined benefit fund. John also oversees investments in Lecera's retiree healthcare assets for about 185,000 active and retired members. Prior to Lecara, John was CIO at New Mexico Para. John's been in the game a long time. We'll put his bio in the show notes. John, welcome to the show.
[00:01:48] Speaker A: It's fantastic to be with you, Angela. It's always fantastic to talk to you.
[00:01:52] Speaker B: Well, that's kind. I appreciate those good words. John, let me give you a couple warm up questions. Ready? Sure. Handwritten notes or digital everything?
[00:02:01] Speaker A: Oh, I tend to keep handwritten notes.
[00:02:06] Speaker B: Okay.
[00:02:06] Speaker A: But I tend not to take many notes. I think it's really important to try to be engaged.
And to be engaged, I find just the way I work. If I'm focused on my notes, I'm not focused on the person.
[00:02:20] Speaker B: Okay. Solo lunch to think or lunch meeting to network.
[00:02:25] Speaker A: I tend to have more solo lunches to listen to podcasts and I can't listen to myself, but to listen to things like this.
[00:02:34] Speaker B: Okay, so LA has over 100,000 county employees. They're counting on you. Do you ever run into a Le Serra member at a Dodgers game or maybe grocery shopping?
[00:02:47] Speaker A: I have.
And actually we crossed a huge milestone recently, which is active and retired members have crossed 200,000, so. But it's a huge county in terms of size. Size in multiple dimensions.
And there may be more people I come across than I realize. But every time I'm an avid cyclist, I'm out on my bike and I see public safety, I always go over and talk to them.
[00:03:13] Speaker B: Cool. Okay. My last one. If you could have dinner with any cio, past, present, living or dead, who would it be?
Wow.
[00:03:22] Speaker A: I could answer it in a couple of ways. I think it's always interesting to have dinner with people in different disciplines.
And I'm a student of history, so I don't have a good quick answer to that. But it would probably be somewhat historical and someone who maybe broached investments from a different discipline.
[00:03:46] Speaker B: Fair enough. Okay.
All right. So now we're all warmed up, John. Let's get into the topic tpa. And if you just give me a minute, I'm going to set the stage as I understand it. So we have some, you know, some kind of maybe common ground or uncommon ground. It depends.
[00:04:01] Speaker A: Okay.
[00:04:02] Speaker B: But it just. In the last year, it really seems that investment consultants and a handful of asset owners have been promoting this total portfolio approach, tpa, as an alternative to saa, where SAA really is like a single model, where asset owners create a policy benchmark, it's aligned with their long term objectives, and then they allocate to asset classes within the portfolio. TPA proponents claim is much more flexible.
It's a range of approaches rather than a single model. And they believe this range of approaches is applicable to asset owners of all different sizes. And they tend to have four or five common tenets when they talk about tpa. One is you manage the portfolio holistically and you evaluate each investment based on its contribution to the overall portfolio objectives. Second, use risk factors as the common language. Third, you budget risk across multiple dimensions and objectives. And fourth, this is one I always kind of struggle with. You align governance, accountability and organizational culture to support this collaborative approach.
What do you think, John? Is that summation fair?
[00:05:20] Speaker A: There's a lot in there. Angelo.
[00:05:23] Speaker B: We got 25 minutes left, John.
[00:05:25] Speaker A: Sure, sure. So maybe a way to think about it is to zoom out, then zoom in.
[00:05:31] Speaker B: Okay.
[00:05:32] Speaker A: By zooming out. And maybe this is a blanket statement that when you capitalize letters, you just make it more complicated in many instances. So if I were to make the statement to you, people matter and people matter in any human endeavor, that's pretty uncontroversial.
[00:05:56] Speaker B: Okay.
[00:05:57] Speaker A: However, when you add capital letters and we see that in the current discourse across this country, you know, about people mattering, it all of a sudden becomes a the subject of a national debate. And so I think in some sense we over complicate things by capitalizing it by focusing on nomenclature as opposed to actions. So to go to the question at hand, I think that taking a total fund approach is almost obvious. I think that most plans do something like it and it's something that has developed kind of organically for them in terms of trying to meet whatever their mission is. It's something. So I think that at Wacera and I can go into details of what our total fund approach is, but it's something that, you know, when I was in New Mexico, that we did a decade ago, we took a total fund approach.
And I think that there's a certain elegance of focusing on not what others do, but what we need to do at LERA, what we need to do for our 200,000 members, and that's to generate returns while maintaining appropriate liquidity, while managing risk in accordance with the board's tolerance in order to pay benefits today, tomorrow and well into the future. And we do that through what we call a functional framework. And so I think that there may be some overlaps.
I don't want to capitalize any of the words that we use such that I'm not talking out of both sides of my mouth. But we, for example, we have four functional asset categories where we group assets with like characteristics.
So we put together public and private equity in our growth bucket to, you know, and as you said that, you know, we're thinking about risk and common risk factors. And by saying public equity and private equity are different because of the vehicle they're held in may ignore the fact that they have very high correlation such that our growth bucket focuses on those assets that we need to pay retirement benefits well into the future.
Likewise, we have a risk mitigation bucket which includes long term Treasuries, investment grade, fixed income, diversified hedge funds and cash. And likewise, those are the strategies that we need in order to preserve capital to, to be total fund diversifiers to help us pay liquidity with liquidity to pay benefits today. The two other buckets are real assets and credit. But so I think that there is a lot of commonality with what we do.
There are some distinctions with some of those four characteristics that you identified.
But I think what we're trying to do is focus on our mission, focus our investment beliefs without getting hung up on nomenclature.
[00:09:13] Speaker B: So you're not capitalizing the TP and A?
[00:09:16] Speaker A: No, we're not capitalizing it. I think that we are equal opportunity as it relates to every letter in the Alphabet.
[00:09:22] Speaker B: And John, you mentioned you were doing this even in New Mexico. You took this. Can I still Call it a holistic approach.
[00:09:29] Speaker A: It's a total fund approach, absolutely.
[00:09:31] Speaker B: So we're not going to capitalize. Total fund approach. We're going to let those all stay lowercase. But you. So you've been doing it for a year. Why do you think it's percolating up now, putting aside, I mean, what you've done? Why now?
[00:09:44] Speaker A: Well, I think that there are organizations, and I give them credit, there is. I think it's very. In an environment that is complex, I think that we should always look to learn and in many ways, simply allocating to managers and in blind pools and hoping that works out to be the best return. Risk analysis or outcomes, I think may not be sufficient when the economic state where there's so much potential uncertainty. So I think that there's a certain elegance to it. And I think that all of us are dependent upon constantly trying to improve our craft.
[00:10:25] Speaker B: That I agree with. But they make the explicit argument that. That the loudest proponents talk about how the world has changed. Regimes are less stable, portfolios are more complex, risks are nonlinear. I mean, you and I have been in the game a long time. I mean, I remember a lot of messiness, and I'm not sure the world has changed that much or whether this is a rhetorical device they're using or perhaps they don't understand history. You were mentioning history in our warmup questions.
It just seems to me like they're setting up a straw man argument that now's the time, given the world has.
[00:11:01] Speaker A: Changed and it's impossible for me to understand the motivations of others.
I don't profess to have that type of. Did you run A for all this?
No, I'm not. I'll be very clear today that I am not. I think that there, once again, I think that it's important for all of us, for every institution to have agency in every decision.
And maybe these capital letters are. Maybe the A should really be agency in that it forces institutional investors to be contextually thoughtful with every decision, recognizing that every decision has a relation to every other decision.
And I think that maybe at Lesera, we've taken it a step further.
We adopted our functional framework in 2019 when the board grouped these asset categories together, but at the same time, we grouped our investment team together in that same framework. So, no, not only are we taking a total fund approach to physical capital, to financial capital, but we're doing it to human capital, where we have asset category teams.
But those asset category teams map to like we have a growth team, a real Asset team, a risk mitigation team, a credit team. We don't have those silos. And then we couple that with two cross functional teams focused on portfolio analytics, which is kind of our middle office as well as stewardship. So I think that we recognize that it's multidimensional, not just with how we allocate capital, but how we construct our team. And then we take it one step further with how the team interacts with one another in order to make investment decisions.
[00:13:03] Speaker B: To use the language of tpa, this competition for capital in terms of allocating capital across those, I'll say the four teams and then you have your two cross functional teams. But is there is that part of it where you sit and you figure out the best choice given risk and return across the whole portfolio?
[00:13:22] Speaker A: I would say that there is competition within the teams, not between teams, but within teams. So if we're looking at a growth investment, you know, is the best expression of it in public markets or private markets, that's something that our growth team will think about. You know, our equity portfolio. Same is true within credit, where, you know, what's the best way to express an investment? Is it in, you know, a closed end or open ended fund?
And one of the ways that we, I would say further compete for capital.
And competition may be the wrong word, but debate the deployment of capital is in our staff investment committees where we have permanent members of those committees that come from those asset categories and then we have rotating members who are on those committees and they come from other asset categories and across functional teams such that you can't make a good private equity investment, for example, unless you understand credit markets. And within our investment committee structure, every person has a vote, every vote is equal. My vote is withheld to the very end, at the end of a articulated process. So I think that this is a way of deconstructing our capital, both as it relates to financial capital and human capital.
And so I think that we do have competition in the form of healthy debate. But I think this is really important that it's really challenging to properly market time and recognizing that we're investing for generations and to do that precisely correct in every time period with every single investment. So for example, if I don't know how we can properly debate a venture investment against a real asset like a data center, they potentially bring very different things and both are additive to portfolios over time. And you know, those specific points in time when they will present themselves as the right investment. And you know, there are a couple of examples of that, you know, right now we're going through kind of a mega trend as it relates to artificial intelligence. We made investments in 2019 in multiple asset categories that are capturing that AI wave today. So that includes venture capital investments. But the second derivative of AI may be data centers and energy that that powers those data centers that's necessary for AI.
I don't know.
In a very one dimensional competition for capital, you can properly anticipate megatrends and the derivatives of those megatrends.
[00:16:25] Speaker B: John, I'm going to just take this a little deeper.
I think you joined in 2017, am I right?
[00:16:33] Speaker A: Yes.
[00:16:34] Speaker B: And you're telling us that in 2019 I think you put together the total fund approach.
[00:16:39] Speaker A: Yes.
[00:16:40] Speaker B: Did you have to change the governance structure to move to a total fund approach?
[00:16:47] Speaker A: And I don't think any CIO changes the governance structure. They get the governance entity changes the governance structure. What we did in 2017, in 2018, we did the first strategic asset allocation exercise.
And part of that was introducing what a functional framework was. So we had a lot of education with the board. It was something that we brought in third parties to speak to the board. And ultimately it was a board decision as it relates to combining asset categories that had very high correlations, common risk factors to one another.
Then subsequent to that, in 2023, we did do a more comprehensive governance review at Le Sara. And as a result of that, the board did delegate decision making to staff.
But I think that decision making, that governance is, I think that more evolutionary processes are more durable. And to the extent you shift the, you know, you go 180 degrees, you know, one year, I think that you may go 180 degrees or 270 degrees back the next if there isn't a good process where everyone takes ownership of that decision.
So I think that we're constantly evolving. And one other aspect of this evolution as it relates to OSERA was the board prior to my joining adopted a statement of investment beliefs. One of the things that we did, I think we elevated those in two dimensions. First, in 2019 or so, we moved our statement of investment beliefs into our investment policy statement.
They're front and center. Then we revisited our statement of investment beliefs a decade after the board adopted them to really understand the permanence and are they more statement of investment beliefs should be more, more than kind of table stakes, types of statements. So I think that evolutionary modifications are much more durable and powerful given the.
[00:19:03] Speaker B: Frameworks you've put in place. Has that impacted your human resources in two ways? Your hiring and your culture. Because it sounds like there's a healthy debate. It may not be competition, it's a healthy debate, but you need people that are thinking about the growth bucket and not just public equities. So two parts to that. One is culture, and second is hiring.
[00:19:30] Speaker A: And the first part is in terms of culture. It's something that we work on all the time and we work on it in a variety of ways.
One is we have kind of an explicit day. We have one day a month where we have no manager meetings, no portfolio meetings. I mean, obviously if there's an emergency, that always takes priority. But it's the third Thursday of every month we have culture day where we bring in speakers, where we work on our craft as a team.
And it's something that sounds, I don't know what it sounds like, but it's something that we do and that anyone can, can take the agenda, can take an item and push it. And we had a series last year of how to give presentations, business writing, you name it. So I think that that's one aspect of it. Other aspects is that there's the ability for people to move from team A to team B. I think that's a real great way. And in 2019, when, when we had the board adopted an allocation to real assets, we'd never real assets team. So it was raise your hand if you want to get involved in real assets. And I think that allowing that kind of portability really, I think enhances culture. Other dimensions of growing culture is that we try to break down the hierarchy. Hierarchy is very important. Ultimately, I'm responsible for outcomes and I'll take the blame.
But good ideas come from everywhere. And some of the best innovation we've had have come from don't come by job title and seniority. We developed a manager scorecard that started with kind of a more junior person where that's multiple dimensions. We rate every single business partner qualitative and quantitative. We have.
I think there was a statistic, statistic that was put in front of the board yesterday at a board meeting that 80% of the presentations to the board came from cross functional projects. So I think that we really want to be a learning organization where good ideas come from everywhere. And I think that our committee structure, where everybody votes, really tries to empower and foster succession planning, redundancies, you name it. As it relates to recruiting, I think that this is, you know, I'm working with some of the best people I've ever worked with in my career. And you know, you've referred to me being old a couple times, so I'll take that. There's the benefit of having worked with a lot of people in a lot of places. And the team at Lercera is outstanding. You know, and maybe I'll pause for a second to say outstanding. You know, double underscore, punctuated.
And I think that we try to, where possible, promote from within.
I want to avoid groupthink, but I think that we also try to. There are members of the investment team that come from other divisions at Lesera.
I think that's another great way to recognize all the talent that resides in the organization.
But I think that we're constantly looking to enhance the team. Colter's a big part of it, but I think that we have great people and are constantly looking to really put them in a position to succeed.
[00:23:09] Speaker B: Sounds like a great place to work, John. But I'm not surprised. And I don't mean to call you old. I want to call you tenured.
Okay, I'm old. You're tenured.
You know, I'm trying to. Trying for myself to see the difference between the total Fund approach and the total portfolio approach.
Besides capitalization, there's a lot of overlap.
[00:23:33] Speaker A: Now, but I think there is, yeah.
[00:23:36] Speaker B: Culture, governance. Because governance is empowerment.
Accountability rests with you, as you've pointed out.
And you talk about how you've been able to put a staff together that's able to work collectively instead of in silos.
Healthy debate. I kind of like Culture Day. I think that's a great thing. I wish I would have had that when I was an employee for someone just to learn something new, but I'm struggling to. You know, aside from your functional framework, where you have, you know, what I'll call four categories and two cross functional groups, that seems to me to be the difference right now between TPA and Total Fund approach, at least in the conversation. Am I missing something?
[00:24:26] Speaker A: Maybe. I think maybe it could be benchmarks. I think we have a policy benchmark, which is our allocation to those, our four functional categories. Each one has a specific benchmark than it is rolled up to a total policy benchmark. And I think that may be a difference. I think it's very important for a board, through its benchmark, to articulate its risk tolerances.
And I think it's incumbent upon staff to explain deviations. And benchmarks shouldn't be used for marketing purposes. Benchmarks are a different dimension of accountability.
And in many ways, the returns that we're going to get in calendar year 2026 are already determined upon Past decisions.
And those past decisions are reflected in a benchmark. And I think that benchmarks bridge time and decisions made over various time periods and keep the team accountable. Because when, when we meet with, you know, we have another day here at Le Sara where we do a quarterly performance review where we review every single position asset category in the portfolio. And maybe this is another aspect of how we grow our team and that that's led by the junior staff.
And we have to explain variances from benchmarks. So I, I think that just comparing the fund to 60, 40, 70, 30, or the actuarial benchmark may not be as granular as how we look to see what's working, what's not working, and what potential modifications we should have.
[00:26:13] Speaker B: So you've got a total policy benchmark. TPA likes talking about a reference portfolio, which I'm not quite sure what that really is and how it's used, but okay. The other thing that comes to mind is factors.
TPA is all about factors. And looking at these opportunities in terms of factors, it reduces to factors.
Is that something that's common in your framework?
[00:26:40] Speaker A: Well, we believe that our functional framework is the foundation of that is there's a growth factor common in private equity and public equity. So that's why we have a growth bucket. And then within that growth bucket, we look to best express it in the, you know, all of the things being equal, the lowest cost, least levered, most liquid form, and the one with the most governance rights. So I think that there are commonality, there is commonalities relates to factors. I think with some private assets, factors can be very noisy, especially if you're investing in a blind pool. It's hard to articulate what those factors are till after the fact. But that's another way where I think that we look to, have we talked about competition or debate. I think we also look within our functional framework to have competition of structure where we, in our credit portfolio, for example, we look to invest more through dedicated managed accounts than through funds. Through dedicated managed accounts, we have better transparency, better liquidity, better governance rights, lower cost such that it's not the blind pool and higher cost that you may have in a fund structure, or we may have, you know, competition in terms of structure where we'll choose to do a co investment as opposed to a fund or smaller, you know, primary fund commitment and larger co investment. So I, I think that, and with those types of structures, maybe it's, we're better able through our risk systems because we invest a lot in systems to have better Insight into those. Those factors.
[00:28:31] Speaker B: So factors are part of the calculus.
[00:28:34] Speaker A: Yes.
[00:28:34] Speaker B: Yeah. But it sounds like you go beyond factors. And we don't have to talk anymore about factors, John. I get that. So we're at about our 30 minute mark, and I got to be respectful of your time and the audience time. Is there anything I'm missing in terms of your approach, total fund approach, vis a vis tpa? Because I got to say, your articulation, holistic risk factors, you know, you're focusing on risk, alignment with governance, accountability, empowerment with staff. Sounds kind of familiar to me without the capitalization.
Am I missing something that's a distinguishing factor?
[00:29:11] Speaker A: I don't think so. But the one thing that I would add is proof points.
Whatever your framework is, there should be proof points. And we believe that our functional framework, lowercase has worked. If you look at just the COVID period, where we went through several market cycles, arguably in a compressed time period, it allowed us to capture gains when markets were up. But maybe most importantly, because we're a mature pension and cash flow negative in fiscal year 2022, the year ending June 30, 2022, we're. When many peers were down, we were positive.
And I think that's a testament to how our functional framework forces us to have investment strategies that work in all market conditions and not thinking that we know best before the fact what might happen, because no one anticipated Covid would be what it was. So I think that proof points are critical to, as you look back to see is, is a methodology working or not?
[00:30:25] Speaker B: All right, John, I've got a final question. I ask all my guests, what's the worst?
[00:30:29] Speaker A: Will I have dinner with.
[00:30:31] Speaker B: No.
That ship has sailed, man. That ship has sailed.
The question is, what's the worst pitch you ever heard, given how old you are and how long you've been in the game? I got to put that tenure thing out there. But, you know, something comes to mind, and it probably was one that I did to you a while ago.
[00:30:51] Speaker A: I would say that the worst pitch is every fund, every firm needs to do their diligence. And it starts with knowing organization's name. When I've received several solicitations, inbound solicitations, where they confuse Lera with a peer, you know, in our geography. And I think that is.
That's a mistake.
[00:31:21] Speaker B: Yeah. That's a footfall. You can't move on from there, that's for sure. Geez.
Well, John, I'm going to say in closing, I sure hope that we don't have a new category of awards for you and your peers for Best tpa. I don't want to see it go that direction.
This should be something like you've shown us today that's incredibly organic and leads to results that benefit, you know, your your beneficiaries. At the end of the day, it's a. It's an approach without capitalization.
So.
But John, that's it. Let's wrap it up. Thanks for being here.
[00:31:56] Speaker A: Thank you, Angela. I always. I always enjoy talking with you.
[00:32:00] Speaker B: Thanks for listening. Be sure to visit PNI's website for outstanding content and to hear previous episodes of the show. You can also find us on P I.
Links are in the Show Notes. If you have any questions or comments on the episode, or have suggestions for future topics and guests, we'd love to hear from you. My contact information is also in the show notes, and if you haven't already done so, we'd really appreciate an honest review on itunes. These reviews help us make sure we're delivering the content you need to be successful to hear for more insightful interviews with Allocators, be sure to subscribe to the show on the podcast app of your choice. Finally, a special thanks to the Northrup Family for providing us with music from the Super Trio. We'll see you next time. Namaste.
[00:32:53] Speaker A: The information presented in this podcast is for educational and informational purposes only. The host, yes, and their affiliated organizations are not providing investment, legal, tax or financial advice. All opinions expressed by the host and guest are solely their own and should not be construed as investment recommendations or advice. Investment strategies discussed may not be suitable for all investors, as individual circumstances vary.
