Australian Catholic Superannuation CIO Michael Block
The CIO of the Australian Catholic Superannuation Retirement Fund is worried investors could be paying too much for growth assets just before a downturn.
No one in the investment community could have anticipated the impact of a global pandemic when it hit the world earlier this year. But whether through long-time experience or working in a wide array of asset classes, some may have been more prepared than others. Paul Colonna fits that bill.
Over the course of three decades, Lockheed Martin’s CIO has spent time in a host of financial-services roles in a handful of different countries. At Lockheed Martin Investment Management Co., Colonna is responsible for more than $70 billion in retirement trust assets and all facets of investment strategy, portfolio management, manager selection, asset allocation, risk management, and due diligence.
While he hasn’t fully soured on risk assets, he does believe that the rest of this year may bring more muted returns than what we’ve seen so far. He recently spoke with us about his views on the markets, his take on inflation, the importance of getting diversity and inclusion right, and a handful of other timely topics.
Let’s start by talking about how you got involved in the industry.
I’ve always been interested in the financial markets but coming out of college I had no idea about the diversity of opportunity that was out there. The markets are always evolving, which is fantastic, and 30 years later as I look back on my career, I realize I’ve never been bored or felt like I’ve been static. I got started in the mortgage business and on the fixed income side, going from a GSE to an asset manager, and then I got involved on the equity side and also got some global exposure. So this diversity in asset classes, diversity in geography, and the diversity in the types of firms I’ve worked for has really kept me engaged. I feel fortunate that I’ve been able to do so many things and have been able to enjoy the breadth and diversity of the industry.
The market volatility we’re seeing as a result of the ongoing coronavirus crisis, along with other global events, has been noteworthy, to say the least. What’s your take on where things stand now as it relates to the markets and the economy?
Like most firms, we started 2020 with a game plan we had carefully laid out, and in March we crumpled it up and threw it away. As we sit here today, it’s been stronger than I would have guessed earlier in the year in terms of asset returns. We’ve had incredible fiscal stimulus – we’ll probably get a bit more at the end of the year – and we’ve gotten incredible monetary stimulus. I think the Fed learned a big lesson from the global financial crisis and was much quicker and more responsive this time around than it was in 2008 and 2009. And while the economy has not fully reopened yet, that process is much quicker than a typical economic cycle. But I do think a lot of the stimulus and reopening optimism has been baked in. We’ve been fortunate that we’ve been risk on, and from a tactical sense we’ll be looking to reduce some risk for the rest of the year. That’s not to say that markets can’t go higher, but the big gains may be behind us. And then in 2021 we’ll have time to debate the bigger questions like the amount of debt we now have and how many of the job losses are permanent.
As we continue to make our way through the pandemic, what is your biggest fear from an investment perspective?
The biggest debate we’re having here is about inflation. The two sides of the coin are pretty well staked out. On the one side are the monetarists who say we have massive deficits, reshoring of supply chains and other dynamics that will drift us towards higher inflation. On the other side are the more economic fundamentalists who say we’ll have larger output gaps, along with the trends we saw before COVID-19 in terms of demographics and technology improvements, that are still going to be there, so the longer-term trend of lower inflation will continue. I put myself in the camp of thinking, from a real economy standpoint, that we’re still looking at those lower inflationary trends. The big risk, of course, is that that thesis is wrong. There would be huge knock-on implications from rapidly increasing inflation expectations or from actual inflation.
Talk about the importance of taking a long-term view in your team’s investment decisions.
I think it’s probably our biggest advantage. In some ways it’s also probably one of the most underused advantages throughout the industry. The way the industry works tends to push you towards short-termism. A three-year horizon may not seem too short, but over the course of our liabilities on the pension side, or the career and lifespan of a DC plan participant, three years is a drop in the bucket. Over a long-term horizon I want to be looking for true strategic investments that can help fill the illiquidity piece of the portfolio and give us outsized returns over time. That could be a bunch of things – long-lived assets, strategic partnerships or ownership in companies. But most of the industry gets caught up in the short-term side of things and while they’re doing well, they could be doing much better. A chunk of their portfolio isn’t going anywhere for the next 30 years, so you can do some really creative things if you unlock yourself from that short-term thinking and open up to those possibilities.
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 think most people agree on the ‘G.’ There’s broad consensus on governance, we understand what it is, and we all want to have good governance. But when you start to talk about the ‘E’ and the ‘S’ it can mean a lot of different things to different people, which can create confusion about what ESG really means. We aren’t going to mandate a focus on having ESG products, but what we do see our managers thinking about is having a strong opinion about when they are assessing the environmental and social aspects. And we make sure we understand how they’re doing that to ensure it is consistent with the outcomes we want to see in terms of the investments we’re making. I don’t envision us investing in a specific ESG product, but I do see ESG getting built more into the overall investment process.
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?
It’s an important aspect of the business and I say that based on the notion that we sometimes live in our own ecosystems and networks that we develop as individuals, and one real weakness of that is they are often not broad enough. You tend to hire people that look and think like you do, and over time that creates suboptimal outcomes. One thing we focus on is making sure that the networks we’re going to hire from are diverse. We hold ourselves accountable for having an opportunistic process of bringing in people of diverse characteristics. And the other key aspect of this is that people often forget about the ‘inclusion’ aspect of ‘diversity and inclusion.’ Even when you bring in diverse candidates, many times you lose them. You need to support the process of hiring that talent by delivering on the inclusive environment, where people want to stay. If someone comes into the firm and they think it’s really just about a numbers game, they’re going to leave.
What’s the biggest challenge in your role?
It’s not the markets and it’s not the day-to-day activities, it’s making sure we’re thinking strategically enough. How do we keep delivering strong strategic thoughts into the organization and how do we align with what the company wants to do in terms of talent management and retention? How does our pension and 401(k) management align with the company and how do we stay innovative enough? We need to keep pushing for the best possible outcomes and never be satisfied, because you can achieve some pretty good outcomes and be okay with that, but I want to live in a world where we’re producing the best outcomes, and that’s a big challenge.
What do you like to do to unwind outside of the office?
You only have so much time and when I look at working and my family, that’s pretty much all that I do. My favorite things are definitely family activities, like traveling and having meals with them, and I love to golf. But you can only do so many things, and if I can get my family life right and my work life right, I’m okay at the end of the day if I have to give up a few hobbies.
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 articles 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.