Boeing CIO Liz Tulach
As the Chief Investment Officer (CIO) at Boeing, Liz Tulach is partly responsible for the retirements of tens of thousands of past and present employees.
Ask Michael Block what worries him most right now and his answer is simple: TINA. No, not an annoying relative or an irritating neighbor. TINA stands for “there is no alternative,” and the chief investment officer of the Australian Catholic Superannuation Retirement Fund (ACSRF) is worried investors could be paying too much for growth assets just before a downturn.
ACSRF helps people who work in Catholic education, healthcare, aged care and welfare plan for their future by providing superannuation, insurance, retirement planning and financial planning services. The fund has more than 85,000 members, 15,000 employers and a portfolio worth over AU$9 billion.
Block believes risk assets are currently overpriced as a result of excessive optimism and says the uncorrelated assets he would like to use to diversify equity risk are hard to find in the current environment. But it’s not all doom and gloom; in fact, he sees plenty of opportunities for patient, long-term investors. PGIM recently spoke with Block to get his views on a handful of pressing issues from a CIO’s vantage point.
Let’s start by talking about the market volatility we’re seeing as a result of both the coronavirus and other major global events. What’s your message to your members?
One of the first things we worry about is that personal investors tend to have a habit of buying in at the top and getting out at the bottom, so our message has been ‘stay the course.’ By that I mean, find the long-term strategy that best suits what you want to achieve, stick to it, and avoid any short-term knee-jerk reactions to the panic surrounding COVID-19. That was especially important in the March-April period. Secondly, we have a saying in Australia that goes, ‘when the tide goes out you can see who’s wearing swimming costumes.’ There are a lot of strategies that are very directional that have done well in the past, but when you have periods like we did earlier this year you get to see who really has skill and whose returns are coming from other sources. The other side of that coin is that volatility also brings great opportunity; we thought the markets were expensive last September, so we went underweight equities and had the opportunity to buy those back in the March-April period. Finally, this is a once-in-a-lifetime opportunity to get a second chance. If the severe market pullback made you uncomfortable for whatever reason, you now have the chance to reassess at pretty much the same level as back in December. If that volatility was too much for you, now is your chance to correct that.
As we continue to make our way through the pandemic, what is your biggest fear from an investment perspective?
If you’re an investor today, what are your choices? You can put your money in a government bond and earn something like 1% for 10 years. After taxes and fees, you’ll make a return lower than the rate of inflation. My biggest concern is that in that environment, people will keep going up the risk curve. If you want to make a real return, equity-like risk is the only thing available. Right now that’s working, but there will come a time when people will pay too much for equities and force them up to really high prices, just before a downturn. People who should have safer portfolios are going to end up having predominantly equities and it’s going to happen just before the market hits a peak. You ignore history at your peril. In the current environment, I also worry about excessive optimism about a vaccine for the coronavirus, and markets may be close to being priced for perfection.
Given the long-term nature of a super participant’s investment horizon, what role do illiquid assets play in your investment process?
Australian investors have had illiquid assets mainstreamed into their process for many years. Here’s the problem: Even though our pension plans are designed for very long-term investors, our government has made it so members can take their money out, penalty-free, within a very short period. So now we have a mismatch; as a CIO I’d like to hold as much in illiquid assets as my cash flows can support, but you can’t hold too much because when you need the money you can’t get it. We’d love to make more long-term, illiquid investments because they’re the perfect match for a superannuation fund, but the illiquidity is an issue and this has been evident recently for those funds that had a high amount of illiquid assets.
While some parts of the world are much further along than others, ESG is increasingly becoming a driver of investment decisions around the globe. How do you view the role of ESG?
I have a slightly different view of ESG than many of my peers. I don’t think ESG considerations should be separated from the rest of the fund. In other words, if I’m an investor I should be taking into account all risks, so I think ESG should be mainstreamed into investment management alongside all other factors and risks. Do I think well-governed companies will perform better? Yes. Does it make sense to avoid holding a pile of stranded assets, like fossil fuels, or to not have any reputational risk of being invested in a company using child labor? Of course. Many of the things characterized into this separate little box called ESG are all part and parcel of being a good investment manager. Everything that happens in ESG is something that every manager should always deal with, all the time.
Fees are often a concern for both participants and investors. How do you balance the focus on fees with the need to provide members access to institutional-type investments?
Fees are exceptionally important, and in Australia they’re extremely competitive. The two most important ways our fund is assessed are fees and performance. My way of thinking about it is to focus on the best investments I can make while getting the most bang for my buck. I look for niche markets where skill comes to the fore, and that’s where I spend my fee budget. As an example, for international equities we are semi-passive, and we don’t think that asset class is a good use of our fee budget. In emerging market debt funds, we do think there is good use of our fee budget. As a rule of thumb, we think of it on an alpha-capture ratio. If in Australian equities it costs around 30 basis points to make a 3% excess return but in the US it costs 60 basis points to make the same return, you’re better off being active in Australia and less active in the US.
Diversity within the ranks of asset management is an important consideration at PGIM, and throughout the industry overall. Can you offer your views on the role diversity plays in your business?
Being the father of four daughters I’d be in big trouble if I didn’t believe in equal opportunity regardless of gender. I certainly think it’s vital, and that’s something we practice here. If I live in a world where Michael just says, ‘I think bonds are great’ and everyone on the team says, ‘Yes sir, no sir, three bags full sir,’ you get no diversity of thought, and you get poor results. On our team no one is afraid to speak up and say, ‘Michael, you’re wrong,’ and that leads to better solutions as well as a better work environment. And to achieve true diversity things should be based not simply on gender but on all factors such as religion, race, ethnicity, age, background, etc. But the reality in Australia today is that if I want to hire an investment professional, the applicants will be 90% male, so it’s difficult to get that gender equilibrium. And that’s a shame because there have been studies that show the best makeup of a team is a very diverse mix of talents, often with the majority female. Accordingly, I am all for addressing this imbalance and encouraging more diversity and more females in investment management.
Can you talk about LifetimeOne, ACSRF’s lifecycle strategy?
We talked before about picking the strategy that’s right for the individual investor. We don’t think that’s a one-size-fits-all proposition. A 20-year-old and a 60-year-old should have different strategies. LifetimeOne puts our younger members into more aggressive growth strategies and older members into safer strategies. By making a smooth transition over time we can reduce sequencing risk. Our lifecycle strategy has lower direct investment management fees, is designed to give our members a better result in terms of retirement savings, and comes with lower risk over time. And it did exceptionally well earlier this year, when the average pension funds, and our younger members, were down about 10%, but our older members only lost 2-3%. Remember, the absolute best thing that can happen for younger members is for the market to do badly – if you don’t need your money for many years your contributions can buy quality assets when prices are low. This is the benefit of dollar cost averaging and buying low and selling high.
What’s the biggest challenge in your role?
It’s the tension between great long-term investment strategies and being measured on a short-term basis. For example, let’s say a year ago, when bonds were yielding 1.5%, I thought holding them for 10 years would give a poor long-term return, but in the last year they performed spectacularly well. Over the long term I think I’m doing the right thing, but in the short term it causes our fund to underperform. Likewise, we think EM debt offers great opportunities, but that’s yet to prove itself over the past year or so. Remember, many of the greatest investors in history were sacked as a result of strategies that eventually turned out to be correct. As Keynes said in the 1930s: “Markets can stay irrational longer than you can stay solvent.”
What do you like to do to unwind outside of the office?
I do have a grandson so it’s lots of fun having a little one running around. All my daughters share my passion for watching rugby league, so we watch a lot of sports. And most recently, spending way too much time eating. But you ask what I like to do outside the office, and literally for the last four months, home has been the office, so it has been difficult to delineate between what’s work and what’s home. But doing things with my family and friends is what I really like. Go Roosters!
PGIM’s Vantage Point Series is written for C-level executives and is intended to offer a glimpse into the issues that are important to these decision makers. The stories look at the challenges facing CIOs and the industry trends they see as most vital, along with a broader range of topics relevant to institutional investors. For more information about the series, or to be featured in an upcoming installment, please contact IRG.