Letter from the US: In search of balance
A woman leads one of the US pension funds most committed to long-terminism. She is Theresa J Whitmarsh, executive director of the Washington State Investment Board (WSIB), managing over $100bn (€89bn) of state pension, insurance, and other assets. She is also an advocate for a better gender balance in the financial industry, especially in the private equity sector.
Whitmarsh joined the WSIB in 2003 with 20 years’ experience in business, government and media. Since December 2013 she has also been a member of Focusing Capital on the Long Term (FCLT), an international initiative to encourage institutional investors and money managers to take a longer view.
“For us, long-termism means asking companies to focus on the creation of long-term value, not on stock price appreciation in the short,” Whitmarsh tells IPE. “Recently, we’ve seen a change in capital allocation by companies. Some companies have spent more on stock buybacks than in capital investments or R&D, because they feel the pressure from Wall Street analysts and investors who look for short-term profits. We, as pension fund managers, have very long term liabilities, so we are naturally interested in long term profits. That doesn’t mean we don’t like gains in the short term too, but not at the expense of long term results.”
The WSIB’s long-term view translates into a 43% allocation to assets with a longer horizon: 23% to private equity, 15% to real estate, and 5% to tangibles such as agriculture, timber and infrastructure. “We tend to practice what we preach, so we are thinking about how we can use our position to speak up more in favour of long-termism,” Whitmarsh says.
The WSIB is not among those pension funds criticising private fees as excessive and intransparent. “Costs matter and it is true that private equity is the most expensive asset class but for us it has also generated the highest returns net of fees,” the executive director explains. “We are viewed as leaders in this sector. Since we started our investments in the 90s we have accumulated a lot of expertise and very good relationships with PE managers. So for us, as long as the cost/return ratio is right, we are okay.”
On the other hand, hedge funds have never been in the WSIB’s portfolio. “They are relatively illiquid, and we already have exposure to illiquid investments. Besides, most hedge funds are based on active equity strategies and in some of these areas we think that it is very difficult, if not impossible, to beat the market. That’s why for public developed markets stocks, we invest in low-cost, broad-based passive index funds.”
Over the last few years, WSIB has seen opportunities to invest more in the energy sector, to add value on the margin, and has been less concerned about the oil price collapse. “The energy market is cyclical, and we believe it will eventually revert to the mean,” Whitmarsh observes. “Last January at the World Economic Forum (WEF) in Davos, the consensus was there isn’t a huge oversupply in oil, so it will not take a lot for the market to revert to a normal supply/demand ratio. Moreover, in the very long term, most agree that demand for energy will continue to grow.”
WSIB’s annualised performance is 8.5 % since inception (July 1992), one point above the current 7.5% assumed rate of return, which is revised every two years. The next revision will be in spring 2017. “I will not be surprised if we’ll lower it again,” says Whitmarsh. “It’s tougher to make money in this environment of slower economic growth and lower returns.”
Thanks to good returns, the WSIB was almost fully funded (95%) in 2013, but the funding rate has since declined to 87%. “We were among the very first pension funds to adopt the new longevity tables, which take into account the fact that retirees live longer,” explains Whitmarsh. “So we had a one-time adjustment to our liabilities. With an increase of the contribution rate by our sponsors, we expect funding levels to remain strong.”
The question of gender balance in the investment industry is not just a matter of fairness for Whitmarsh. “A better balance of gender in private equity will bring more diversification, an expanded talent pool and increased access to female capital,” she wrote in a paper for the WEF. Today in the private equity industry only one in seven senior professionals are female.
“If we had to exclude private equity firms because of lack of diversity, we wouldn’t have any partners,” Whitmarsh elaborates. “We are not going to do that because we have a fiduciary duty to maximise returns at a prudent level of risk for our stakeholders. Besides, even more important than numbers, is having women in visible positions. So we are taking slow, first steps, asking private equity managers, who are very good at solving problems and turning around companies, to use the same business approach to improve the gender balance within their industry. I’m confident this can also lead to better financial returns in the long run.”