A Conversation with the CIO of the Minnesota State Board of Investment
The article below is from our BRIEFINGS newsletter of 23 September 2020
As the CIO and Executive Director for the Minnesota State Board of Investment (MSBI), Mansco Perry oversees approximately $100 billion in assets. At a recent Goldman Sachs Asset Management (GSAM) Forum discussion, Perry spoke with GSAM’s Katie Koch, co-head of GSAM’s Fundamental Equity business, and Mike Swell, head of Global Portfolio Management within the Global Fixed Income team, on his core investment philosophies and processes, asset class preferences, and the role of diversity.
Katie Koch: Mansco, prior to becoming CIO of MSBI in 2013, you were CIO at Macalester College and at the Maryland State Retirement and Pension system. How has your investment philosophy and approach evolved over time and how are you implementing it at MSBI?
Mansco Perry: Historically, we’ve had a pretty small team at MSBI and my predecessor, Howard Bicker, kept things simple. So if you look back over the last 40 years, our pension portfolios haven’t changed very much. The majority of our portfolio is still in public equities—in international and domestic equities—and in fixed income. But over time, our allocation to the private markets has increased. When I first joined MSBI in 1990, we had a target allocation to the private markets of 10%, which we gradually raised to 15%, then to 20% and now we’re at 25%. Currently, our actual allocation in the private markets is more around 15%. My personal philosophy is that there are basically two things an investor can do: Own good assets or lend money to good borrowers to ensure you’re receiving a reasonable return.
Mike Swell: Having invested through multiple economic cycles, how did your philosophy help you navigate what’s been one of the biggest dislocations in markets this year that we’ve seen in recent history?
Mansco Perry: Fortunately, my first CIO job was at the Maryland pension system in 2008 where I quickly appreciated the need for liquidity during the global financial crisis. You figure out pretty quickly that your job isn’t to make the most money in portfolios, but to ensure that you can meet your liabilities to make pension plan payments—and I gained a greater appreciation for Treasuries during that time period. Since I’ve been back in Minnesota, I’ve been pushing the need to increase our allocation to Treasuries which we did a few years ago and which has turned out to be our best-performing asset in the last two years.
Mike Swell: Speaking of liquidity, you had mentioned earlier that your target for private assets is about 25% and that you’re currently at a 15% allocation. What are your views on private markets as an asset class?
Mansco Perry: We’ve been in the private markets—and predominantly private equity—since 1981. Historically, PE has been our best-returning asset class. And while we recognize there’s a so-called lack of liquidity, I believe you do get fair values in the private markets over the long term. When I look at the roller coaster ride that equities have been on this past spring, it’s hard for me to believe those values truly represent a steady stream of those companies’ future cash flows. Of our allocation to private markets, about 50% to 60% is typically in private equity, where I believe there’s a strong principal-agency connection. We’ve also invested a fair amount in private credit, mostly mezzanine loans, and have recently been investing in direct lending. And while we don’t invest in hedge funds, we have been looking at some opportunistic and distressed assets. Our real estate allocation—which was large in the 1980s and 1990s—had declined to less than 1% of our portfolio shortly before I re-joined MSBI, but we’re reevaluating that sector on both the debt and equity side.
Katie Koch: One of the ways that we’re long-term oriented in our public equity investments is that we’ve integrated ESG into our investment processes to help identify risks and opportunities. Our philosophy is that it’s not just an issue of equitability but it’s also one of profitability. In fact, we’ve aligned our proxy voting process in that way to get more corporate boards to get more diversity on their boards. How do you think about ESG in your investment philosophies?
Mansco Perry: I’ve come to believe that ESG, more than anything, is a philosophy rather than a product we would buy. For my part, I believe that plan sponsors should be pushing, promoting and prodding all of their managers to pay attention to ESG, regardless of the asset class. We recently signed a petition opposing the Department of Labor’s recent rule which could discourage retirement funds from making investments based on ESG considerations. We’re also pulling out of any thermal coal investments. On social issues, we have been pushing our proxy committees to expand the number of women and people of color on their boards. Given my background and personal history, I believe it’s something that’s pretty important. I grew up Newark, New Jersey and back in 1967, a similar situation to George Floyd’s murder took place. A number of moves and efforts were enacted back then. But people soon forget and here we are, 50 years later and going through the same reawakening. I do think the investment industry can play a larger part, but unless there’s a concerted effort, I’m very concerned about the future.
Katie Koch: When you think about the world from a macro perspective, how much of a threat is income inequality in the current environment?
Mansco Perry: I think it’s a big threat. I started thinking more about these issues when we had the Occupy Wall Street movement in 2011. Personally, I think there’s enough wealth and innovation in this country to make our economy much larger. Outside of urban America, if we put the type of effort that we put into developing say, emerging markets, into areas such as the Appalachians, the Mississippi Delta and many of the areas in the Rust Belt economies, we could expand the economic pie and create a more vital economy. I’m convinced that through innovation and advances in technology we could educate everyone. And if we could do that, we could eradicate poverty and truly give an everyone an opportunity to participate in the economy.
Mike Swell: Can you talk about how you look at the funded status as a public plan versus a corporate plan, and how it’s impacted your asset allocation?
Mansco Perry: Fortunately, we are a public plan not a corporate plan, so we haven’t had to be very liability driven. We’ve been fortunate that our funded status in aggregate across the pension plans and retirement systems that we manage have been in the high 70s, low 80s and in one of the plan I manage in the low 90s. Still, we recognize that whatever we do, we’re going to have be equities-centric in our public and private investments. We have to make the returns. Fortunately, we’re able to take a long-term investment horizon.
We did just raise our fixed income allocation to 25% and will likely have between 12% to 15% in Treasuries going forward. Our concern there, however, is that we’ve had a pretty good run with rates going down—and I have some concern about rates going negative. So we’re looking at our long-dated Treasuries now and thinking we need to set some triggers where we might have some discussions to lower the duration of our portfolios. At some point, with all the money being printed, if markets were to behave as they should, rates should go up—and I don’t think I want to be there at that point in time.