Tom Tull, the former chief investment officer of the Employees
Retirement System of Texas (ERS),
the
$35 billion state pension fund, and now fellow at AIF Global, an economic think
tank, has had a
long
and distinguished career, starting in the 1970s. In this exclusive interview
with Markets Group’s
Iain
Bell, he details his mindset in navigating various crises – including the
present one of high inflation
and
rising rates – and offers advice on how to develop the right attitude for
uncertainty.
Markets Group: Allocators stress the importance of precedent and track
record when assessing
managers. Given the uncertainty of today’s inflationary
environment, the only precedent we have is
the 1970s, the decade in which you started your career. What were
those circumstances and how did
you and your mentors navigate them?
Tom Tull: A lot of things were going on in the ’70s. There was a cocktail of
high inflation, economic
stagnation,
easy monetary policy – all the basics. It stemmed from social welfare programs
and the
wind
down of the Vietnam War. With all that, we had a government that was very much
inclined to
keep
the economy rolling and with that came inflation and ultimately stagflation. Our policymakers
also
had the bright idea to convert the U.S. dollar to a fiat currency and take away
the backing of gold.
With oil being priced in U.S. dollars and no gold backing,
OPEC felt compelled to raise prices. Price
control was the response. All things
considered – anything that could go wrong, did go wrong.
What
I learned from the ’70s was that you really can’t get wrapped up in the
soundbites of the day.
You
have to be cautious, selective and thoughtful. Most importantly, you have to
ignore the
inclination
that you [must] act, that you have to make an investment or that you have to
get
involved.
I learned early on to let the dust settle. You’re going to have recessions,
inflationary
rises – these things will always occur. It’s a matter of being proactive and
not reactive.
MG: Another crisis that you worked through was, of course, the Global
Financial Crisis of 2007-08.
You
joined the ERS as CIO in 2009. How did you recalibrate the fund in wake of the
crisis?
TT: I was brought in to help set the strategy for ERS. I took over
responsibility as CIO shortly after. The
areas
that I concentrated on were severalfold. One, I’m a believer that you shouldn’t
run a public
fund
like a public fund, but as a business. For that reason, I focused on building
the investment
function
internally. One of the steps was to first establish the asset classes that we
were comfortable
with
and compliment what was already in place. Two, to build a team—in fact, we
doubled the
staff—and
did things internally at one-quarter of the cost. Three, be more proactive in
managing
asset
classes. We were just beginning to get involved in alternatives and I expanded
that to include
private
equity, private real estate, infrastructure, hedge funds, venture capital, and
expand public
equity
internally. After that, 60% of our assets were managed internally. Most importantly, I was
fortunate
in having a tremendous team to work with.
We
took the view not to just wait for the maturity of these assets. Rather than
just buy and subscribe
to
certain relationships like private equity, we managed our private assets like
we would a public
equity
portfolio and utilized the secondary market. We also introduced and put into
market
[exchange-traded
funds]. We would help originate the ETFs and get revenue share over time.
Finally,
we
established a platform for emerging managers. They’re thought leaders, good
performers, but
they
need capital. We leveraged that expertise and provided a service at the same
time. So, in times
of
crisis or in any time, really, implement a more proactive management process.
MG: How would you advise your peers who are investing in a
high-inflation, rising-rate market?
Which
do you see as the conditions that will affect strategic allocation now, and
where might the
stress
come from?
TT: You really have to be careful this time around vs. the past as now
we’re seeing the politicization
and
weaponization of policy. And policy will extend or constrain the outcome going
forward. Leave
your
ego at the door and don’t be compelled to invest. There will be tremendous
opportunities in
times
like this. But there’s no rush. Europe is an area going into recession (if it’s
not already in
recession).
There’s more than enough time to pick and choose among different
asset classes in
Europe
such as private equity, credit,
private real estate or infrastructure. With the
capital that’s
flowed
into these asset classes in the region, which are ahead of the game, they need
consolidation.
That’s
the opportunity.
MG: On the weaponization of policy, we’ve seen the American government
blacklist certain Chinese
securities
and prevent pension funds from allocating there. What are your thoughts on when
policy
weaponization
might end?
TT:
It will evolve. I think there are two complications whenever governments get
involved in dictating
on
where, how [and] when you get to invest. One, you’re constraining the ability
to influence what’s
important
in a given situation. We had this with South Africa, Iraq, Iran, and now China.
Whenever
governments
get involved it muddies the water. Two, there’s opportunities. If you have good
relationships,
throughout these countries, this time will pass. For example, in the U.S.,
there has
been
a political concern with U.S. pension funds investing in China because of
accounting rules. Now
we
have the accounting groups in China working through this process and it looks
as though there
will
be more accountability and integrity of accounting statements consistent with
U.S. GAP
standards.
So, times can change. China will continue to be a problem, but I think it’ll
get better as we
go
forward. There are tremendous opportunities there and in emerging markets in
Asia generally.
MG:
If you were to sum up your advice to pension investors today, given where the
global economy
might
go, with recession in Europe, inflation sticking in certain areas of the
American economy,
increasing
geopolitical tensions, rising rates and the looming threat of climate change,
how would
you
do so?
TT: Don’t feel
compelled to invest for the sake of investment in negative
environments.
There will be plenty of time to do homework to avoid the latest perception of
reality.
Overlay
that with the curse of social media and fake news. I think it’s going to be a
while before we
get
back to the heady days of economic growth. We’re wrestling with the Fed, we’re
wrestling with
central
banks, and we’re wrestling with increased regulatory constraints. With all this,
it’s about
picking
and choosing and being opportunistic, whether that be in industries such as oil
or energy or
in
different geographies. Cut through the noise, travel again and visit companies,
both globally and in
the
U.S., and focus on what’s important to generate competitive risk-adjusted rates of returns.