CIEBA Executive Director Dennis Simmons
Simmons, now the Executive Director of CIEBA, began his career on a rather memorable day: Black Monday.
We think it is prudent to be defensive and have a quality tilt in this environment.
PGIM sat down with Harshal Chaudhari, the Chief Investment Officer at GE. Chaudhari spoke about his early days in the industry, his take on the current market environment and the Fed, his views on ESG and a host of other issues.
Let’s start from the beginning. How did you get involved in the industry?
I am an engineer by training and worked in technology early in my career. However, I have always been interested in markets, so I went back to school to study finance and economics. After school, I started at IBM’s treasury on the capital markets desk in the spring of 2008, right in the middle of the financial crisis. Investing and trading in a highly volatile environment during my first year was a phenomenal learning experience. Subsequently, I worked in corporate finance strategy and served as the CFO for a couple of software divisions. At that point the CIO opportunity opened up at IBM Retirement funds and I was excited when the role was offered to me. For the last three years I’ve been the CIO at GE, where I oversee the company’s global pension assets. I feel that the combination of financial markets, M&A, and operating experience I developed from my previous roles make me a better investor. Most of all, I enjoy the fact that this job allows me to continue to learn something new every day.
It’s been a remarkable year, to say the least. Can you offer your broad views on the market backdrop and the Fed’s efforts to fight inflation?
The inflation that we are seeing now can be traced back to a combination of an easy monetary policy of the past few years as well as the supply chain disruptions and the stimulus that came because of COVID. In my opinion, the tightening cycle should have started much sooner. However, it wasn’t until March, when the CPI was already above 8%, that the asset purchases finally ended, and we got our first interest rate hike. At this point, the Fed has little choice but to act decisively and follow through with the policy they have laid out to slay this inflation that has proven to be sticky. I fear that the risk on the forecasted terminal rate of 4.5% may be on the upside. Which means the probability of a soft landing is low, so we have a cautious outlook. We think it is prudent to be defensive and have a quality tilt in this environment.
Talk about your thoughts on the importance of active vs. passive in such a volatile environment?
I think that there is a role for both. Passive is a great choice for most individuals and many institutions that do not have the resources or research capabilities. We utilize passive funds and ETFs primarily for liquidity reasons, but the majority of our portfolio is actively managed. While active management is a zero-sum game, we believe that large institutions, like ours, with a long-term horizon, professional resources, and a process-driven approach are well-suited to harvest alpha. Markets are not always fully efficient; frictions do exist and there are non-economic actors who are motivated by factors other than profit maximization. Empirically, the opportunity set expands in an environment where there is high uncertainty and wide dispersion in returns, like where we are today.
What’s your take on incorporating illiquid assets into your investment process?
I’m generally a proponent as they can offer a different exposure that’s not always available in public markets. Private strategies provide access to early-stage innovation, non-traditional financing solutions, flexibility in structuring, and complex operational transformations that are difficult to achieve in the public domain. Also, as long-term investors, we are not so worried about having daily or monthly liquidity – we can harvest the illiquidity premium.
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 ESG investing?
ESG provides an important lens to uncover both risks and return opportunities. If you look underneath the cover, the investment community has always been explicit about the importance of governance. When it comes to ‘E&S,’ good analysts implicitly accounted for companies that created negative externalities, or disregarded stakeholder concerns as riskier. ESG has increased the focus on these issues, which is welcomed, but I also worry about it becoming a product label. We believe that integrating ESG in the investment process and analyzing environmental and social risks and impacts holistically is a more pragmatic approach and will deliver much better outcomes than treating ESG as a mere checklist.
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?
Diversity and inclusion is critical to our business. At the end of the day, it goes back to incorporating different thoughts and voices in the process. From an investment perspective, we need original thinking and points of view. We don’t generate alpha when everyone thinks alike. Not only do we want greater representation of gender, ethnic and cultural diversity within our teams, but we also want everyone to feel comfortable being their authentic self and feel empowered to bring differentiated ideas, enriching the process. We pay a lot of attention to diversity and inclusion in our own hiring and talent development practices, and we expect the same from our investment partners. It’s a long journey but the more questions we ask and hold each other accountable, the better we will be.
As the CIO of a very large retirement plan, what’s the biggest challenge in your role?
As a corporate pension, we have a total return focus to close the funding deficit and build a surplus, but we also need to manage liability volatility because that impacts the corporate balance sheet. Managing this dual objective of long-term goals and short-term metrics can be a challenge and a balancing act that is often not well understood. We are also a new team, formed during COVID, so it is important to ensure our culture is right and that we nurture good processes allowing us to make consistent and solid decisions. We have been back in office for almost a year now and that helps a lot.
What do you like to do to unwind outside of the office?
When I’m not working, I spend most of my time with my wife and two children. On weekends, you will often find me at my daughter’s soccer game, in the kitchen cooking or catching up on my reading. We travel when we get a chance and watch movies. The TV shows are coming out so fast and furious that I’m always catching up, but it’s fun when we can find time to do that.