Capital Allocators – Inside the Institutional Investment Industry: Episode 417

Jon Glidden - Delta Airlines Pension Fund Turnaround

Release Date: November 18, 2024
Host: Ted Seides
Guest: John Glidden, Chief Investment Officer of Delta Airlines

Introduction

In Episode 417 of Capital Allocators – Inside the Institutional Investment Industry, host Ted Seides welcomes John Glidden, the Chief Investment Officer of Delta Airlines. The episode delves into Glidden's remarkable management and turnaround of Delta's $16 billion pension fund, transforming its funded status from a precarious 42% to an impressive 102%. This comprehensive discussion explores Glidden's innovative investment strategies, the challenges faced, and the critical factors that contributed to this historic achievement.

John Glidden’s Background

John Glidden begins by sharing his unique journey that led him to his pivotal role at Delta Airlines.

Key Points:

• Early Life and Education: Glidden grew up in a Navy family in Newport News, Virginia. Influenced by his father's career as a submariner, he developed a disciplined approach to saving and investing from a young age. He pursued mechanical engineering at Georgia Tech through a Navy ROTC scholarship.

• Military Service: Serving as a Surface Warfare Officer, Glidden held significant responsibilities, including being the Officer of the Deck on a nuclear-capable destroyer and working closely with SEAL teams.

• Transition to Finance: After his naval career, Glidden pursued an MBA at Emory University and furthered his education with financial math studies at the University of Chicago. His internship experiences, particularly with Lazard’s private real estate group, sparked his interest in private markets.

Notable Quote:

"I got hooked on investing while I was in the Navy. I knew that I wanted to retool, I wanted to learn about investing, I wanted to learn everything there was."
(05:37)

Investment Strategy: The Four Forces

Glidden outlines the four key forces that drive his investment approach, known as Portable Alpha.

**1. Private Markets Force:

• Strategy: Investing in under-managed assets at a discount to unlock real returns.
• Components: 30% allocation to privates, including private equity, private credit, and private real assets.

**2. Portable Alpha Force:

• Strategy: Utilizing unconstrained market-neutral hedge funds to generate alpha that exceeds borrowing costs.
• Components: 40% allocation to hedge funds targeting a 3% alpha over borrowing costs.

**3. Portfolio Construction Force:

• Strategy: Leveraging derivatives to move beyond the efficient frontier to the capital market line, enhancing returns per unit of risk.
• Implementation: Employing a 50% beta overlay using derivatives to amplify portfolio returns.

**4. Governance Force:

• Strategy: Differentiating from peers through unique investment approaches while maintaining robust governance to manage risks and sustain strategy during downturns.

Notable Quotes:

"We've got this private markets force, this portable alpha force, the ability to work with unconstrained market neutral managers to beat a borrowing cost."
(07:20)

"How do we unlock some of that power through the use of derivatives and leverage."
(07:35)

Implementing the Strategy at Delta Airlines

Glidden provides an in-depth look at how he applied these four forces to transform Delta’s pension fund.

Initial Challenges:

• Underfunded Liability: When Glidden joined Delta in 2011, the pension fund had $7.5 billion in assets against a $13 billion liability.
• High Expected Return: Delta maintained a 9% expected rate of return, the highest among S&P 500 companies, exacerbating the funding gap.

Strategic Approach:

• Allocation Structure:
  • 30% Private Markets: Focused on buyout-centric private equity, venture capital, and real assets with stringent management to avoid J-curve pitfalls.
  • 40% Hedge Funds: Emphasized market-neutral strategies to generate consistent alpha.
  • 10% Cash: Maintained liquidity to manage high benefit payouts and market volatility.
  • 20% Other Strategies: Included risk parity, inflation hedging, and emerging manager programs.

Notable Quotes:

"If we can borrow at the risk-free rate, we can just lever our tangent portfolio. We can make more money per unit of risk."
(10:15)

"We want to beat benchmarks, we want to drive Alpha, and we want to do it in big numbers."
(53:56)

Navigating Challenges: The COVID-19 Impact

The COVID-19 pandemic posed unprecedented challenges, testing the resilience of Delta’s investment strategy.

Impact:

• Market Volatility: Equities plunged 35% in five weeks, severely impacting the portfolio’s beta overlay.
• Liquidity Strain: Delta’s revenues dropped by 97%, necessitating rapid liquidity management to meet benefit payouts.

Response:

• Unwinding Derivatives: Glidden swiftly unwound derivative positions to monetize profits and stabilize the portfolio.
• Cash Reserves: Mobilized $3 billion in reserves to cushion the impact of market downturns.
• Hedging Adjustments: Increased reliance on managed futures and separate account macro managers to navigate the volatility.

Outcome:

• Funded Status Recovery: Despite the severe downturn, Delta’s funded status recovered from 63% to 85% within 16-18 months, eventually reaching 102%.

Notable Quotes:

"We had to unwind $750 million of that or so. And then we get to March 23, 2020. Delta's revenues are down 97%."
(39:18)

"Portable alpha was perfect. It was almost on top of my numbers that added over 120 basis points per year at the overall plan level."
(20:41)

Risk Management

Glidden emphasizes robust risk management as a cornerstone of successful capital allocation.

Key Strategies:

• Liquidity Waterfall: Developed a structured liquidity plan to prioritize cash sources during downturns.
• 60-70% Hedge Ratio: Adjusted the derivative overlay to maintain flexibility and manage exposure.
• Diversification: Increased the number of hedge fund managers to mitigate correlation risks and enhance stability.

Notable Quotes:

"The prime directive of portable alpha. Do not let the markets push you out of your beta position. Do not let the markets push you out of your alpha positions."
(35:00)

"We've got to keep this plan alive. We want to avoid a second bankruptcy."
(36:07)

Key Drivers of Success

Glidden attributes the success of the pension fund turnaround to several critical factors.

**1. Strong Governance and Support:

• Executive Backing: Continuous support from Delta’s CFO, Paul Jacobson, and President Ed Bastian.
• Collaborative Leadership: Regular consultations with financial experts and investment committees to refine strategies.

**2. Disciplined Capital Allocation:

• Consistent Contributions: Delta contributed $11 billion from 2012 to 2021, offsetting $13 billion in benefit payouts.
• Strategic Reinvestment: Re-invested profits and carefully managed exposure to maintain growth.

**3. Innovative Investment Approach:

• Portable Alpha: Successfully integrated private markets and hedge funds to generate substantial alpha.
• Leverage and Derivatives: Prudently used financial instruments to enhance portfolio returns while managing risks.

Notable Quotes:

"Without hardworking Delta employees in that disciplined capital allocation, we didn't have dividends in those days."
(46:21)

"We started with the fat, with the profits. You got to start cutting a little bit of muscle and then there's deeper cuts as you go along."
(38:33)

Advice to Others

Glidden shares valuable insights for managing large-scale pension funds and navigating financial crises.

Key Recommendations:

• Governance Buy-In: Secure unwavering support from executive leadership and governance bodies.
• Clear Communication: Articulate the investment strategy clearly to all stakeholders to ensure alignment.
• Flexible Strategy: Maintain a dynamic approach to adjust strategies in response to market conditions without deviating from core principles.

Notable Quotes:

"You've got to be able to tell the story concisely and simply. You've got to be able to tell the story, and you've got to be able to give control to your governance."
(48:03)

"If you can start from a place of two points of alpha, everything else is so much easier."
(49:05)

Reflections on the Investment Process

Glidden reflects on his original four-force strategy and its enduring impact on Delta’s pension fund management.

Insights:

• Consistency in Strategy: The foundational four forces remain central to the portfolio’s structure, enabling flexibility and sustained growth.
• Continuous Improvement: Regular recalibration ensures the strategy adapts to evolving market dynamics and organizational needs.
• Team Collaboration: Emphasizes the importance of a cohesive team and strategic partnerships to execute complex investment strategies effectively.

Notable Quotes:

"It's what we're still 30% privates. It's why we're still 40% hedge funds. It's why we're still 140% is what our asset allocation adds up to."
(49:05)

"The power of the team and working with people and being influenced by other people and not having to have the right answer all the time."
(57:52)

Personal Insights and Closing Remarks

Towards the end of the episode, Glidden shares personal anecdotes and life lessons that have shaped his professional journey.

Personal Interests:

• Hiking: Enjoys exploring the Western Carolina mountains with his family, highlighting the importance of work-life balance.

Life Lessons:

• Teamwork: Values the collective effort and the importance of leveraging team strengths over individual prowess.
• Adaptability: Recognizes the necessity of being flexible and open to others’ ideas to enhance decision-making processes.

Final Thoughts: Glidden expresses his passion for investment management and his commitment to continuously driving alpha within Delta’s pension fund.

Notable Quotes:

"It's such an amazing Delta story. I'm so proud to have been a part of it."
(46:21)

"You need to have a governance that embraces this. From the outset, Delta was willing to look a little bit different on the investment side because their investment needs were different."
(48:03)

"I love beating benchmarks. It's why I'm here. It's why I get out of bed in the morning."
(53:56)

Conclusion

John Glidden’s tenure at Delta Airlines exemplifies strategic foresight, disciplined investment, and resilient risk management. His leadership transformed one of America’s largest pension funds, securing financial stability and ensuring the solvency of the plan. This episode of Capital Allocators offers invaluable lessons for institutional investors aiming to achieve similar successes through innovative strategies and steadfast governance.

Notable Quotes Summary:

• Investment Strategy Insight:

  "We can borrow at the risk-free rate, we can just lever our tangent portfolio. We can make more money per unit of risk."
  (10:15)

• Handling Adversity:

  "Portable alpha was perfect. It was almost on top of my numbers that added over 120 basis points per year at the overall plan level."
  (20:41)

• Team and Governance:

  "You've got to be able to tell the story concisely and simply. You've got to be able to give control to your governance."
  (48:03)

• Personal Reflection:

  "The power of the team and working with people and being influenced by other people and not having to have the right answer all the time."
  (57:52)

This episode serves as a masterclass in institutional investment management, underscoring the critical interplay between strategic allocation, risk management, and collaborative leadership in achieving financial turnarounds.