Podcast Episode Summary: "Lessons from Managing $300 Billion Dollars with John Skjervem (CIO of URS)" (E137)

Podcast Information:

• Title: How I Invest with David Weisburd
• Host/Author: David Weisburd
• Episode: E137: Lessons from Managing $300 Billion Dollars with John Skjervem (CIO of URS)
• Release Date: February 11, 2025

In Episode 137 of "How I Invest with David Weisburd," host David Weisburd sits down with John Skjervem, the Chief Investment Officer (CIO) of Utah Retirement Systems (URS), to discuss his strategies and insights from managing a substantial $300 billion portfolio. This episode delves into the intricacies of pension fund governance, asset allocation strategies, private versus public market investments, and the lessons Skjervem has learned from his extensive experience, including during the 2008 Global Financial Crisis.

1. The Impact of Transparency on Pension Fund Performance

John Skjervem opens the conversation by challenging conventional wisdom regarding transparency in pension fund governance. He posits that transparency with a capital 'T' is negatively correlated with investment returns, a stance that may seem counterintuitive to many stakeholders.

John Skjervem [00:00]: "When we were last chatting that transparency with a T, capital T was actually negatively correlated with returns. Why is transparency a bad thing?"

Skjervem explains that excessive transparency often leads to public spectacle during board meetings, where media, lobbyists, activists, and other external actors disrupt the decision-making process. This environment can hinder effective investment strategies and long-term planning.

John Skjervem [00:33]: "Most public plans, red or blue state, have what I call fishbowl governance structures where the board conducts its business in a public meeting. These things turn into spectacles."

He contrasts this with URS's approach, emphasizing the importance of opacity in maintaining objectivity and minimizing political interference.

John Skjervem [04:15]: "The opacity of our process is what enables us to be objective. And in my experience, the transparency of other programs is lauded for all the wrong reasons because it opens the process up to all sorts of actors and agents for whom the solvency of the program and the performance of the program is not the objective function."

2. Governance Structures in Pension Funds

Skjervem critiques the traditional "fishbowl" governance model prevalent in many public pension funds, where board meetings are open to public scrutiny and external influences. He argues that this model often disempowers investment staff and places undue pressure on board members who may not possess the necessary expertise to make informed investment decisions.

John Skjervem [03:44]: "It can be demoralizing because it can appear capricious for Utah Retirement Systems."

He advocates for a governance structure where investment discretion is delegated to specialized staff, allowing for more informed and strategic decision-making without the constant threat of politicization or public pressure.

John Skjervem [02:29]: "No benefits and only disadvantages to that structure... It's a highly suboptimal approach."

3. URS's Asset Allocation Strategy

A significant portion of the conversation centers around URS's unique asset allocation strategy. Skjervem outlines URS's commitment to private markets, with a notable 14% allocation to private equity, of which 50% is dedicated to venture capital.

John Skjervem [10:22]: "14% private equity where we are unique. As much as 50% of that is venture."

He highlights the transition from utilizing fund-of-funds to direct primary investments, allowing URS to retain shelf space and engage directly with high-caliber General Partners (GPs).

John Skjervem [11:30]: "We've got a really impressive roster in venture. Something that couldn't be replicated today because you know the access issues that you and your audience are familiar with."

Beyond private equity, URS maintains a 20% allocation to fixed income, designed to be plain vanilla and low-risk, aligning with the fund's long-term obligations.

John Skjervem [14:07]: "Fixed income at 20% really plain vanilla by design."

Public markets constitute around 30% of the portfolio, with a global orientation and minimal country-specific biases, ensuring diversified exposure.

4. Private vs. Public Markets: Benefits of Managing a Smaller Fund

When discussing the scale of URS's portfolio, Skjervem underscores the advantages of managing a smaller fund (relative to his previous roles with Northern Trust and Oregon's funds). He asserts that smaller fund size enhances access and agility, particularly within private markets.

John Skjervem [16:25]: "Smaller is better... the access and the agility of being small at a place or smaller at a place like Utah, those benefits way outweigh whatever scale economies you're giving up on the public side."

This perspective highlights a strategic trade-off: sacrificing some economies of scale in public markets to gain greater flexibility and more direct engagement with private investment opportunities.

5. Innovative Investments: Real Estate and Alternative Energy

URS's investment strategy extends beyond traditional asset classes into direct real estate investments and an alternative energy portfolio focused on fusion energy.

a. Direct Real Estate Investments

Skjervem elaborates on the benefits of direct real estate ownership, which includes reduced fees and control over holding periods—crucial for matching long-term liabilities.

John Skjervem [10:48]: "What's less appreciated and for me much more important is you control the holding period."

This approach allows URS to align real estate investments with the fund's long-duration needs, providing stable income streams and inflation protection.

b. Alternative Energy Portfolio

The alternative energy portfolio is particularly noteworthy for its fusion energy investments, described as a high-risk, high-reward endeavor. Skjervem admits the speculative nature of fusion technology but emphasizes its game-changing potential.

John Skjervem [24:07]: "Probably the best example would be our fusion portfolio. We've got a portfolio of five fusion investments. Those are very probably binary, you know, either a 0 or 100x because fusion is the holy grail."

He balances this risk by maintaining diversified investments across multiple fusion projects, increasing the likelihood of a significant payoff should the technology succeed.

John Skjervem [24:07]: "We're deliberate in getting as many pieces out on the board because we don't know."

6. Lessons from the Global Financial Crisis (GFC) of 2008

Reflecting on the 2008 GFC, Skjervem shares insights that have reinforced URS's investment philosophy, particularly the minimal exposure to credit markets.

John Skjervem [22:23]: "We have very little credit. That philosophy was validated by the GFC so it reinforces my own philosophy which again is happily consistent with urs, which is we'd rather take our equity risk in equities especially."

This conservative stance on credit exposure has allowed URS to navigate financial downturns more effectively, maintaining stability and protecting long-term obligations.

7. The Role of Advisory Positions and Cross-Organizational Insights

In addition to his role at URS, Skjervem serves on several advisory and investment committees, including the Alaska Permanent Fund, the State Pension of Idaho, and the IEEE Foundation. He explains that these roles provide valuable cross-pollination of ideas and governance practices.

John Skjervem [18:54]: "I gain insight every single time I participate and that insight ultimately accrues to the URS beneficiaries, to the URS staff, to the URS board."

Skjervem draws parallels between URS and the Alaska Permanent Fund, particularly regarding the importance of delegated investment authority.

John Skjervem [20:44]: "Key to APFC success over the years is the delegation of investment authority to staff and it has been very gratifying for me."

8. Investment Philosophy and Risk Management

A core element of Skjervem's strategy is risk budgeting—allocating a finite amount of risk across various asset classes to optimize returns while meeting long-term liabilities.

John Skjervem [22:23]: "If you're like me, if you're a CIO, you think about it in risk budgeting terms. You don't have an unlimited risk budget."

He emphasizes prioritizing investments that offer higher returns for equivalent risk, such as venture capital over private credit, aligning with URS's long-term investment horizon.

John Skjervem [22:23]: "Why would I spend it [risk budget] on private credit? If I've got a world class venture capital portfolio, that's where I'm going to spend my risk budget."

9. Personal Insights and Career Journey

Towards the end of the episode, Skjervem shares a personal anecdote about his unexpected path to becoming a CIO. He reflects on balancing personal interests with professional responsibilities, ultimately leading to his role in managing URS's substantial portfolio.

John Skjervem [26:15]: "I tell people I'm the accidental CIO. I graduated from business school at Chicago and beat a path to Santa Barbara, you know, because I wanted to surf before work and coach my kids' soccer games after work. I accomplished that. But then, you know, all these years later, I wound up as a CIO."

This storytelling adds a human element to the discussion, illustrating that successful leadership can arise from diverse and sometimes unexpected experiences.

10. Conclusion: Balancing Transparency, Governance, and Strategic Investments

In wrapping up the conversation, Skjervem reiterates the importance of objective governance structures, strategic asset allocation, and long-term thinking in managing large pension funds. His approach at URS—marked by opacity in governance, focus on private markets, and innovative investments—serves as a model for other institutional investors seeking to balance performance with fiduciary responsibilities.

Overall, Episode 137 provides a comprehensive look into the sophisticated investment strategies and governance philosophies that underpin the success of Utah Retirement Systems under John Skjervem's leadership. Listeners gain valuable insights into how large institutional funds can navigate complex financial landscapes, prioritize long-term obligations, and innovate within traditional investment frameworks to achieve robust performance.

Notable Quotes:

• Transparency and Returns:

  "Transparency with a T, capital T was actually negatively correlated with returns." [00:00]

• Fishbowl Governance Critique:

  "These things turn into spectacles. Big auditorium, 150 people in the room. Front row is media... There was never John Q. Public, responsible taxpayer." [00:33]

• Asset Allocation Strategy:

  "14% private equity where we are unique. As much as 50% of that is venture." [10:22]

• Advantages of Smaller Funds:

  "Smaller is better... the access and the agility of being small at a place or smaller at a place like Utah, those benefits way outweigh whatever scale economies you're giving up on the public side." [16:25]

• Fusion Energy Investments:

  "Probably the best example would be our fusion portfolio. We've got a portfolio of five fusion investments... either a 0 or 100x because fusion is the holy grail." [24:07]

• Risk Budgeting Philosophy:

  "If you're like me, if you're a CIO, you think about it in risk budgeting terms. You don't have an unlimited risk budget." [22:23]

• Accidental CIO:

  "I tell people I'm the accidental CIO... all these years later, I wound up as a CIO." [26:15]

This detailed summary captures the essence of John Skjervem's insights into managing a large pension fund, highlighting his strategic approaches to governance, asset allocation, and risk management. It serves as a valuable resource for institutional investors and anyone interested in the complexities of pension fund management.