E137: Lessons from Managing $300 Billion Dollars w/ John Skjervem (CIO of URS)

Summary

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.

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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.

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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]

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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.

Transcript

[A]

When we were last chatting that transparency with a T, capital T was actually negatively correlated with returns. Why is transparency a bad thing?

[B]

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. Big auditorium, 150 people in the room. Front row is media. Second row is lobbyists. Third row's activists. Fourth row is gadflies. Fifth row's crackpots. There was never John Koo, public responsible taxpayer. That guy never showed up.

[A]

Double click on your asset allocation strategy. So what are the buckets and how do you allocate today? Last time when we chatted, you mentioned that Utah Retirement Systems has the best governance of any pension fund in America. Double click that.

[B]

Yeah. That was a bold and brash statement. There's three components to that claim. The first is rare, but not totally unique. The second two are totally unique. So the first would be staff has full investment discretion below asset allocation. So the board sets asset allocation strategic targets for the asset classes, and all implementation execution is delegated to staff. Staff. It's rare, but not totally unique. So as I mentioned, David, I'm an advisor to Alaska Permanent Fund Corporation, the CIO there, Marcus and the staff, they have investment discretion, investment authority. There are a handful of programs throughout the country where staff enjoys investment discretion. Contrast that to my time in Oregon. My discretion, $100 billion program. My authority as CIO was limited to $50 million. I'm not that great at math, but $50 million divided by $100 billion is a decimal point with several zeros. My authority there, on a discretionary basis was quite constrained relative to the size of the program. What that means is in a program in which staff does not enjoy authority and discretion, it means all the. All the recommendations have to come before in front of the board.

[A]

Are there any benefits to that for the board? So obviously the trade off is that you kind of have your hands tied. You can't move as quickly. But are there any governance benefits to forcing people to go to the board with investments?

[B]

No benefits and only disadvantages to that structure. Disadvantages to the program, disadvantages to the beneficiaries, potential benefits to the board members. But I would. I would characterize it as a highly suboptimal approach, because as staff, you can work for weeks, months, quarters, potentially years on a transaction, on a recommendation. You know, the gestation period on these things can. Can really be measured in years in some cases. And so it's a very asymmetric dynamic for a Board member. When you have staff who are, if not expert, much more expert than their counterparts on the board, having spent again, weeks, months, quarters, years of their life on this, on this transaction, and then a board member who maybe got off a red eye and read the material on the way over in the morning is forced to make a decision, it.

[A]

Can be very discouraging for staff that not only have they spent years working on investment that gets ultimately rejected by the board, but also seems like it's somewhat of an arbitrary process. So very quickly the staff could get discouraged in terms of putting their best ideas forward.

[B]

It can be demoralizing because it can.

[A]

Appear capricious for Utah Retirement Systems. Urs, you also have two other pillars to your governance. Walk me through those.

[B]

The second pillar, which as far as I know is unique, is that for all investment matters, our board, when it comes to investment matters, the doors are closed. There's no public participation whatsoever. And that is what enables us to discharge our duties, I think in the most objective way, on the merits of the investment, independent of the personalities, independent of the politics. I would say that is the number one ingredient to our success is the opacity. There, I said it. 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.

[A]

When we were last chatting, that transparency with a T, capital T was actually negatively correlated with returns. Why is transparency a bad thing?

[B]

Your knee jerk or your intuitive response is for a public pension plan, that transparency would be good. It's actually not, number one, it is not public money. So the most important misunderstanding is that public pension funds are public money. They are not public money. The money started with taxpayers, went through various municipalities, various instruments and organs of the state. But by the time it gets to me, it's. It's owned by the beneficiaries. I'm a vested member of the Oregon Public Employees Retirement Fund. That money's mine. It's not the state of Oregon's number two. I'm picking on Oregon just because I know it well. But most, 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. Big auditorium, 150 people in the room. Front row is media, second row's lobbyists, third rows, activists, fourth rows, gadflies fifth rows, crackpots. There was never John Q. Public, responsible taxpayer. That guy never showed up. So here's another way I talk about it is Utah's opaque. Oregon is transparent. Utah's a superior program for many reasons. But one of those reasons, because of the opacity, because I don't have to make the argument to you, David, that the elected officials on my board are more political or less political than the elected officials in Oregon. I don't have to make that argument. They may be or they may not be. It's moot because there's nobody for our elected officials to grandstand to. That is the key understanding, the key linkage is elected officials on the board, public meeting, activist lobbyists show up. Boom. Now you've got grandstanding investment staff shows up every day putting together a portfolio, evaluating investment strategies and evaluating managers. Everything we do is to try and put together an investment portfolio that can successfully defeat those liabilities over the next 40 years. We are truly long term investors, but we serve boards that are often comprised with or by elected officials for whom the time horizon is two years or four years. That is the fundamental mismatch. Their time horizon. Their time horizon is two to four years to be reelected or to move on to the next higher office. Our time horizon is 40 years. Boiling it all down. That is the fundamental mismatch. And it gets exacerbated by the fishbowl structure that you know is the hyperactive third base coach waving in all these people, come on in, here's a mic. Say whatever you want. Again, it's not who they are, it's what they represent. They represent constituents for whom an elected official has to pay attention to in his or her time horizon, which is two to four years. That has nothing to do with my time Horizon, which is 40 years. That is the fundamental mismatch.

[A]

So tell me about URS's asset allocation.

[B]

You know, I know a lot about my peer programs because I've. Well, I've been around. You know, I'm old and I've been around, been around a while. I feel like I'm pretty fluent in what the public fund landscape is like. And I would say our program is unique in that it's probably the closest thing to an endowment in a public fund in that we have a very high allocation to public markets. I'm sorry, very high allocation to private markets. We have a very high proportion of direct investment activities.

[A]

What type of strategies or asset allocation would endowment or a URS pursue that may be controversial to the public gets.

[B]

Exposed in the fishbowl governance model as people come in and rail against private equity or they come in and they rail against hedge funds, you know, because of the fees or because of the building errors. And that, you know, that is across the board and that just reflects a lack of understanding of of the structures and the asset classes.

[A]

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[B]

14% private equity where we are unique. Is that a big part of that? As much as 50% of that is venture. That's a legacy issue. A legacy issue in a good way in that the program went into venture capital 30 years ago exclusively through fund of funds and then has been successful in converting those fund of fund exposures to primary investments where most of the GPS honored the shelf space. We didn't have any dedicated staff until to private equity until 2017, so it was all delegated through fund of funds and consultants. But once we started to bring those allocations in house, we were very fortunate to have most of the GPS save that shelf space for us. What was it, you know, historically allocated through fund of funds was converted to primary exposures and there were a couple of exceptions but like I said, most of that shelf space was preserved. I know this comes off to you and your audience as braggadocia, but just by virtue of being in the asset class for that long, we've got a really impressive roster in venture. Something that couldn't be replicated today because you know the access issues that, that you and your audience are familiar with. So you know, 14 private equity good part of that venture. You know, fixed income at 20% really plain vanilla by design. Deliberately plain vanilla, you know, low 30s public markets basically, you know, a global ag orientation. Would love to say we had a home country bias there but. But we don't. Real estate and what we call emip energy mining infrastructure are probably the two most unique. Real estate is unique in that we started migrating to a direct program and this is timely because the director of that program. Devin Olsen just retired. We had his party Last night after 40 years, 40 years in the chair and he was really a pioneer and led and led the migration to a direct program. Out of funds into direct program. Almost 50% of our staff is real estate just because, you know, we own the stuff directly. We don't do the asset management, I mean we don't do the property management but we do most of the asset management. And so that's been terrifically successful. We obviously save a lot of fees and most of the attention on a direct model starts particularly in, you know, in the press and an interview like this. The focus is oh, you know, you save a lot of money. Well that's true, but I think what's less appreciated and for me much more important is you control the holding period. And real estate assets are fantastic assets in a defined benefit program because they're long duration, they have a big income component and of course they're indexed to inflation depending on the property type. So it's, it's really the ideal asset you want to own as long as you can in a DB fund versus you know, a closed end fund model where you go in at 6 and you know, you come out at 4 and everybody high fives because you're printing a big IRR. But then me, the CIO, I'm forced to reinvest in a 4, you know, 4 cap rate environment. It doesn't, in other words just people are looking good in terms of their investment performance but it's not helping me in my ultimate mission which is to fees liabilities across 40 years. The other, this emip energy mining infrastructure portfolio. It's unique in that it's got a big oil and gas exposure. Some of that is direct, most of it is outside of a traditional fund structure. And it has performed fabulously well and done exactly what it was supposed to do, which was provide inflation protections.

[A]

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[B]

So it's a lot of money and I don't want to dismiss that at all. But it's the smallest program that I've run in the last 20 years. So, you know, I was CIO of the wealth business at Northern Trust and even 15 years ago or whenever that was, you know, that was 180 billion. And then Oregon was when I left, it was 111 billion. So this is a much smaller program and smaller is better. And so the, 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. So it's definitely a trade off. But I would again, net, net, net. The, the, the. The access and agility in private markets that accrues to being small is much more valuable in dollars and cents than the scale economies that you get in public markets for being big.

[A]

If you had your choice, what would be the ideal check size that you would want to work with in the private markets?

[B]

Oh boy, you know, it depends if it's energy, if it's venture, if it's private equity, it's very different in each of those we're doing, you know, we've. Within the, within the energy portfolio we have a carve out to what we call alternative energy. Basically it's, it has twofold purpose number one, to provide an explicit hedge to our traditional oil and gas investments as when and as society decarbonizes. So it's an explicit hedge, but it's also designed to participate in the energy transition. So we want to play defense against our traditional stuff, but we also want to play offense and help facilitate the energy transition. And that portfolio is nascent, maybe third inning, but it has five direct investments in fusion so it's really all over the map. You're lucky to get into a top tier venture capital and write a $10 million check. We would rather be with the A team, even if our allocations are smaller, than be with the B team just and be able to write a bigger check.

[A]

Outside of your work at urs, you also have several unpaid advisory investment committee positions at Alaska Permanent Fund, at the State Pension of Idaho, at ieee, which is a foundation. Why take on these roles and what benefits accrue to you as being involved in these organizations? Thank you for listening. To join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe.

[B]

Oh boy. Great question. Taking on the role of several of my peers. I'm with several of my peers on those organizations, so of course that's fun because the governance structure in those organizations is different because the investment objectives are different, because the boards are populated with different types of people and because my fellow advisors are different. 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. By Sherman's got one more experience that taught him we ought to think about X and we ought to try and avoid Y. Professionally it's been very rewarding but I absolutely believe have a complete clear conscience that it makes me a better CIO for the taxpayers of Utah, for the beneficiaries of urs. And I'm I'm pretty vigilant in monitoring.

[A]

That One of those roles Alaska Permanent Fund also very unique governance structure, very cutting edge organization. What do you see as some of the similarities between Alaska Permanent Fund as well as Utah Retirement Systems?

[B]

Alaska Permanent Fund is really important because it's America's largest sovereign wealth fund. It's important for the country because it's America's largest sovereign wealth fund. It's important for the state of Alaska obviously because it's the biggest single asset biggest single financial asset of the state. I'm really proud to serve there because it is such an important organization. It's such an important fund. The governance structure is quite different than ours. It is very much a and I don't use the term fishbowl in a derogatory or pejorative but it is very much a fishable governance structure. It has no direct elected officials but there are political appointees so it's not then dissimilar to the majority of its peers. So we have those governance dynamics where it's similar to urs. And I think key to APFC success over the years is has been the delegation of investment authority to staff and it has been very gratifying for me. I'm five years into my service up there that the commitment to that delegated authority has never wavered. It's what makes the size but also the delegated authority is what makes APFC such such a potent investor.

[A]

You mentioned when we were last talking that 74% of your staff was not working during the global financial crisis. What key insights did you gain from the global financial crisis of 2008?

[B]

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. And, and here's the I think this is an important distinction is it Also depends on your program. If you're URS and you have access to, you know, the A team venture capital roster, why wouldn't, why wouldn't you spend your equity risk there? Why would you spend it in where you can, you know, get, I'm, you know, making the numbers up, but you can earn, you know, 25% as opposed to stretching and fixed income into private credit, you know, to go from, you know, whatever mid single digits to low double digits. It's the, I think the translation is if, 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. You know, your board gives you 100 points of risk. Why am I going to spend any of my 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 and I'm going to design and manage my fixed income for the sole and express purpose of hedging equity risk in a deflationary environment.

[A]

What are some interesting structures or interesting investments that you make that are maybe very risky but have very high returns potential?

[B]

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. You know, I'm much more bullish on fission because I, you know, I think that is a nearer, a much closer path to a clean energy alternative, particularly with some strategies that are either at or near approval. Whereas you know, fusion is still, is still the, the Hail Mary Holy grail. But man, when it works, and I don't know if that's five years, 10 years, 30 years, but when it works, it's, it's a game changer of gigantic magnitude. You know, it's, it's not a lot of money, single million check sizes, but the payoff is gigantic.

[A]

Assume you have 20 million in that category at 100xs $2 billion. It moves the needle. For a $50 billion fund, it moves.

[B]

The needle and it also protects against, you know, the couple billion dollars in conventional energy strategies that will suffer in that environment.

[A]

When you look at investing into something very disruptive like nuclear fusion, are you always looking to make a directional bet or are you sometimes picking. This is the one company that I think is going to be the one.

[B]

Great question. We're not smart enough to know. So that's why I described that portfolio we actually called the Utah Alternative Energy Portfolio. As you know, very early innings in that we're deliberate in getting as many pieces out on the board because we don't know.

[A]

What do you want our listeners to know about you, about your S or anything else you like to share?

[B]

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. I did that. But then, you know, all these years later, I wound up as a cio.

[A]

Institutional cio, certainly a big time cio. And really appreciate you taking the time. And look forward. Salt Lake is beautiful. Look forward to sitting down there or in New York City very soon.

[B]

Yeah, you bet. Thanks for having me.