With stock and bond values down and consumer prices up, it’s been a rough 2022 for retirement savers.
That includes the New Jersey Investment Council, the 16 public worker union leaders and investment pros, most appointed by Gov. Phil Murphy, who oversee the $91 billion the state invests to pay pensions for 800,000 working and retired teachers, police, and other state and local government staff.
New Jersey’s underfunded pensions have long depressed the state’s credit rating and boosted borrowing costs. Murphy’s recent funding increases have helped rebuild its bond rating. But the investment market declines, especially since Russia invaded Ukraine and spiked fuel and food prices, have worried the board and its advisers.
After its July 27 meeting reviewed a grim $5 billion drop in assets since January, as well as some hopeful signs, the system’s newly promoted director, Shoaib Khan, agreed to discuss investment results and prospects with The Inquirer. The interview has been edited for length and clarity.
The performance numbers are preliminary. I want to make sure we manage expectations in these very uncertain market conditions.
Public market securities or private, there’s a lot of pressure from inflation and rising interest rates. We are not out of it; we’re in the depths of these changes. It’s hard to forecast, and it may result in revaluations.
I would expect returns will [continue to be] negative. But to what extent, or how long? Does inflation lead into stagflation and recession? This is not transitory inflation. Nouriel Roubini, an economist at New York University, tells us to think of a shallow recession is delusional. The Fed chairman [Jerome Powell] doesn’t believe it’s really a recession yet.
This is where diversity in a portfolio comes in handy.
We saw hedge funds performing relatively well. We don’t call them “hedge funds” now — we call them “risk-mitigation strategies” — but substantially, they are the same.
Hedge fund managers are able, not only to short [bet on price drops for] currencies, stocks and bonds, but also they use trading-oriented strategies so they can move assets around among various securities, various sectors and geographies.
These times are when hedge funds are supposed to add value. We didn’t necessarily see hedge funds do this in previous crises, but this time it seems to be working. [New Jersey says its hedges gained 5% in the first five months of the year, while U.S. stocks fell 14%.]
When we allocate to private equity, we are locking up capital for years. So private equity should deliver better returns to justify the higher level of risk.
You’re right that they are being measured by comparison to [similar companies] in the public markets. That is a challenge: How can they do better than the stock market?
One way, obviously, is manager selection — hiring better managers — and portfolio selection, buying better private companies. These managers should be experts at reducing costs, creating efficiency, conducting acquisitions that bring value. There are opportunities, for example, in buying up dental care practices, if there’s a general partner who specializes in that area. So they should be able to perform better than public securities and provide [strong] returns.
That’s great for the state. But my job is to manage investments. It’s the governor who has made the commitment to [fund] the pension. It does give us more [to invest].
I don’t want to be in a situation to invest in anything that’s not the right decision.
Sourcing managers is important. If you’ve got a good idea, I want to hear it. At the end of the day, if someone has a good idea, that could add value. But there has to be due process. That’s why you have consultants and a team of professional analysts and investors to go through the due diligence practice. As long as that’s in place, it’s fine.
I’ve been fortunate where I’ve been in roles where I learned a lot. Early in my career, I worked for the Miami pension board. I became a CPA, then controller, then chief investment officer.
I worked five years at a boutique investment firm. I’d written a paper on distressed securities and where default rates could go. JPMorgan was having similar thoughts, and then from 2002-2007 at JPMorgan, we had several great years investing in distressed securities.
Then the leveraged-buyout wave came on, and the market started to tilt. Fortunately I also did risk arbitrage and merger arbitrage. I had a great opportunity to move to Geneva with a Swiss private bank (Union Bancaire Privèe). I traveled the world meeting with endowments and sovereign wealth funds.
That got me back interested in public investing: in Florida where I headed strategic investments (2017-20), then in New Jersey. The key difference from Wall Street to the states is compensation.
(New Jersey recently lifted its $200,000 limit on annual pay; Khan is paid $350,000. Pennsylvania’s largest pension fund paid its top investment officer nearly $500,000 last year, while leading Wall Street bankers earn millions in a good year.)
At a JPMorgan or a Swiss private bank, you have a wide range of clients with long- or short-term investments, it can distract your attention to long-term value. But public plans look to the long term.
We respect everybody’s point of view. We are fiduciaries; we are long-term investors; it’s our job to find investments that add value.
There are changes on the horizon, in energy for example. Are those changes over the next five years or the next 30 years? It’s hard to say.
But we don’t want to move away from energy. We have added allocations to greener energies. With respect to divestment, at some point that may be a conversation, but to walk away from the table doesn’t allow us to have any impact. We believe engagement is important [to pressure energy companies to reduce emissions instead of dumping their stocks while they’re still making money].