By David G. Barry
Shoaib Khan in May was named director and chief
investment officer of the New Jersey Division of Investment, which
manages the investments for the $85.5 billion New Jersey Pension Fund. Khan
served as the division’s acting director and CIO for nearly a year, having taken
over after Corey Amon left to become CIO of the National Rural Electric
Cooperative Association. He had joined the division in early 2021 after being a
senior portfolio manager at the Florida State Board of Administration.
An accountant by trade, he previously
held roles with Axlewood Asset Management, Union Bancaire Privee in Geneva,
Switzerland, J.P. Morgan and the City of Miami General Employees’ &
Sanitation Employees’ Retirement Trust. Khan becomes the fourth person to head
New Jersey’s Division of Investment over the past decade. In a wide-ranging
interview with Markets Group, he spoke about his career path, the appeal of the
New Jersey CIO job, and what he will attempt to do in the 2022-23 fiscal year.
Markets Group: Shoaib, it appears as if you’ve had an
interesting journey to becoming New Jersey’s CIO, having gone from being an
accountant to roles with Miami’s pension fund, a boutique investment firm, J.P.
Morgan, a stop in Geneva, involvement with a family office and time with the Florida
State Board of Administration.
Shoaib Khan: None of us plan to be in a certain role or
in a certain place or anything like that. We just kind of go where our passion
takes us and where opportunities lie. And sometimes it means being in the right
place at the right time. All of those things I think can come together and
bring you to where you are at different points in your career and different
points in your life. And I would say it’s a combination of all those things:
passion, opportunities, challenges and being, you know, in the right place. All
of those I think have played a role in my career.
MG: How did your first job with the Miami General Employees’ &
Sanitation Employees’ Retirement Trust impact your career?
SK: That was my first sort of endeavor within the public pension plan. I
actually stayed there for five years. I started out as a staff accountant and
then became an analyst. There wasn’t a separate investment team. It was either
administration, which handled benefits, pensions and calculations and so forth,
or finance, which handled investing, and I was part of that. Well, the controller
left, and I was asked to step into the controller role and then a year after
that, I got my CPA license and was asked to step into the CFO role. All of
these things sort of allowed me to learn more about investments. And then I
guess you could say I didn’t really have a choice. I became responsible for it,
but it was something that I discovered that I had a great interest in and a
strong passion for.
MG: The economic situation is obviously not great right now. But you are
no stranger to investing in uncertain conditions – correct?
SK: I joined J.P. Morgan in 2002 as a strategy head and until 2007 put
together the team that worked on various distressed and credit opportunities.
If you think back to 2002, you had [the collapse of] WorldCom and a number of
events that led initially to some crises and then, of course, great
opportunities. There were a number of defaults and so forth so credit, long and
short distressed securities, that was what we focused on. … Then came the LBO
wave with increased M&A activity and we followed that cycle and obviously
equities became opportunistic and so we shifted, and it was again a great
opportunity.
MG:
You then joined Union Bancaire Privee in Geneva in 2007, ultimately becoming
global head of portfolio management. But 2007 was just prior to the Great
Financial Crisis. What did you focus on during that period?
SK:
I spent a fair amount of time in Europe as well as Asia and Middle East and in
the U.S., travelling all over the place and really gaining a lot of experience
and exposure and trying to solve our clients’ problems in terms of liquidity,
portfolio management and capturing opportunities. Of course, while you’re doing
all of that, there’s a great opportunity to learn as well.
MG:
It appears as if your career then featured a stint with a family office and
then a role with the Florida State Board of Administration. How did you
ultimately end up at New Jersey Division of Investment?
SK:
I joined Florida SBA in 2017 and it was a great opportunity to work with a team
that was very involved in a lot of different strategies and with [now-former
CIO] Ash Williams, whom I had met some years earlier while we were both in the
private sector. It was a great organization, still is and will continue to be.
But then, of course, COVID came around. I had been based in Scarsdale, N.Y.,
and was traveling back and forth to Tallahassee, Fla., when the New Jersey
opportunity [deputy director and CIO] came up. And after discussing the
opportunity initially with the recruiter and then ultimately [then-CIO] Corey
Amon, it really highlighted the possibility to be impactful and make a
difference. That’s what effectively attracted me to New Jersey and led me to
where I am today.
MG:
Many, it seems, move from public pension funds to the private sector. You,
however, have gone the other direction. What is it about public pension funds
that you find attractive?
SK:
There are pros and cons to both the private and the public sector. Within the
private sector, you have a lot of runway to execute and I think that’s a great
opportunity. But, at the same time, there is this pressure when you think about
long-term investing for short-term results because you have clients – and yes –
a lot of those clients are institutions, but nonetheless there is this watching
of monthly performance or quarterly performance and so forth. So many times,
you’re not able to execute on the long-term asset allocation or the performance
or the results that you’re trying to extract from a long-term perspective, and
you have to manage the short term and intermediate term as well as the long
term which, of course, applies to public sector as well.
But, when you talk about public
pension plans, you have one client, which are the beneficiaries. Now, of course
within that, they are obviously various subsets. We manage several different
pension plans and as well as a cash management fund. But generally speaking,
you’re not talking about a number of clients that have different objectives or
different time horizons. You generally have long-term views and you have long-term
assets and long- term liabilities. That’s where the opportunity comes in with
respect to public where you have the ability to step back, think about where
the world is, where are the opportunities, where are the challenges and the
risks and put together a long-term plan which you can execute on over time and
get the results that are appropriate for the risk-adjusted return or the risk
and the return objective you are targeting. To me, that is very attractive and
that’s what attracted me back to the public sector and public pension plans.
MG:
You joined New Jersey and then served as acting director and CIO for
essentially a year. What did you learn during that time and why did the job of
being permanent CIO appeal to you?
SK:
During my career, I’ve never targeted a position or anything like that. It’s
all about is the role interesting? Does it attract my attention and is it
something that I could come to on a daily basis and be excited about? That’s
the first question I ask myself because if I can’t do that then what are we
doing, right? You’re just sort of coming in and then it’s not interesting. So,
I think that’s the first question that I ask and if I can check off that box.
The next one is ‘can I add value, and can I make a difference? Can I be
impactful in that role?’ If I can check that box off, then that’s what gets me
very interested. And I was able to do that coming in as deputy director and as
a deputy CIO. And then, [Amon] left six months after I joined, and so I was
asked to step in as interim director and CIO and in that role, I obviously
assumed greater responsibilities. My conviction level rose with respect to
having the ability to be impactful and to make a difference and to continue making
improvements that my predecessors have embarked on. I think when I took on
those additional responsibilities and, in conjunction with the rest of the
team, figure out what the objectives are along with what the challenges are
that it became even more interesting. So, when the State Investment Council and
the Treasurer’s Office embarked on a search [for a permanent director and CIO],
I decided to throw my name in the hat because it was interesting. It was impactful
and I could see that I could make a difference. And I think that interim year,
if you will, led to my higher conviction in the role. And I think that allowed
me basically a free trial to see if I’d be right in role and if it’s something
that I’d be interested in. When I went through the interviewing process, I
tried to put my best foot forward because I was so passionate about it. And I
think that it helped me to gain a higher level of conviction in the role.
MG:
Your appointment as permanent director and CIO comes as the economy is heading
the wrong direction. You’ve obviously had experience in dealing with downturns
and financial crises, but describe what it’s like to take over in this
environment and what you are hoping or looking to do with the program?
SK:
Look, I think we there a lot of things that we have some control over in our
lives and in our careers. And then there are far more things that we do not
have control over. And certainly, the markets are definitely one of those in the
latter category. But this is not the first time, and this probably won’t be the
last time as much as we would like it to be. So, I think it is part of the
landscape and I think we recognize that when we’ve done it for a number of
years that there are cycles and with those cycles come challenges, which can lead
to different sets of opportunities. And so, I I think we have to keep that in
mind. Certainly, the [Great Financial Crisis] was one and I think what I’ve
taken away from the various crises that have come up in the past is that it’s
extremely challenging while you’re in the midst of the crisis and we certainly
are in the midst of the current one. But they’re all different. So, you learn
from your previous experiences, and I think by having that experience it helps
you to remain calm and be rational about these things.
MG:
Does your time spent during the Great Financial Crisis help with the current
situation?
SK: When I reflect back on the GFC, the learning came from being there.
It’s just priceless right? You can’t pick up a book and read about it. It’s not
the same thing as being in the midst, when Lehman is in trouble and Bear
Stearns is in trouble and there is a lack of liquidity and all of those things
going on and you’re trying to manage portfolios not just for today but for many
years into the future. So, I think all of that plays into the role and this is
no different, right? We are in a different scenario. We don’t have the housing
crisis. Some would argue that the housing crisis is probably on the other side,
on the other spectrum, right, where prices are overdone at this point. So,
different scenario. But of course, we have inflation, and we have high
valuations and some of those valuations have now obviously come down and so
forth. But going back to my previous point, being a long-term investor is
definitely helpful. Certainly, the critical thing to monitor in these environments
is the liquidity because what you don’t want to be is a forced seller. You want
to have sufficient liquidity to manage through that crisis and then ultimately
be able to deploy some of that dry powder to capitalize on the opportunities
going forward. So, it’s a combination of saying, ‘OK, how do we get through the
period that we are in the downturn, if you will, and then how do we position
ourselves so that we can capture the upside’ because that’s really our role to
step back and see how we can do that. And so, liquidity management is critical.
MG:
Has the Division taken steps to have that liquidity management?
SK: In the beginning of the year, we looked at it again. We didn’t know
that inflation was going to approach 9%. Very few people probably did and certainly
we did not know that the Russian and Ukraine crisis would be where we are today
but clearly, we were looking at an environment with potential headwinds. So, what
we did was reduce some of our exposures and we raised our cash positioning. And
I think that provides us a fair amount of liquidity going forward and it has so
far. And in addition to that, we have liquid allocations as well. Liquidity is
something that we continue to monitor in this environment. At the same time, we
continue to watch the equity exposure as well as the fixed income because again
there are times when the equity markets are impacted and there is a flight to
safety within bonds. Well, this time that isn’t the case. And so, we continue
to manage both parts of that in addition to our private market, which is also
very diverse.
MG:
You’ve mentioned the opportunities that can come out of crisis. How are you
thinking about that this time?
SK: We are currently look at where the next opportunities will be and where
do we allocate to within private credit. There are certain sectors we continue
to watch the default rates. Certainly, we don’t think that we are in a period
of the GFC credit crisis where default rates are going to be extremely high but
nonetheless, we do expect some different defaults to occur, and we do expect
those to increase. So those are certainly opportunities. We think that because
of valuation compressions, there will be opportunities across the board. So
that means various industries and sectors, but also geographically.
We also continue to look externally
outside the U.S. where we have a fair amount of exposure be it in developed
markets as well as emerging markets and where there are valuation
compressions. When there are opportunities to extract from, then we will
start to allocate that dry powder when we see a bit of stabilization. Obviously,
the Federal Reserve as well as other central banks have already embarked on a
relatively active sort of process that will take its course and we will start
to see stabilization, inflation numbers come down and I think that’s where
that’s long term added sort of approach comes in where we can deploy
capital.
MG:
Does it concern you at all that some of the managers that are deploying capital
did not go through the GFC and have not had experience investing in a crisis?
Will that play into your selection process?
SK: Each crisis is different. The dotcom crash was very different from
the GFC crisis. And those were different from the Asia crisis. So, each one is
different and, as the saying goes, what doesn’t kill you only makes you
stronger. And I think if you’ve gone through several of these, I think you’re
better, able to understand it and remain calm and then be able to extract
opportunity. So, whether we’re in a crisis or not, when we look at managers, we
always look at their track record and the experience that they bring and to the
extent they’ve gone through crisis and how they’ve managed through it. It’s all
part of the due diligence process, so I wouldn’t say that it has changed today
because it’s always been part and parcel of the lens that we look through. So,
we’ve looked at the Russia crisis, the Asian crisis, the GFC, the dotcom [bust]
and now we’ve got another data point going forward that is going to be valuable
in that process.
MG:
Are there specific sectors that you and your team are watching in the current
environment?
SK:
From a tactical perspective, we will look at sectors, depending on how and fast
or slow the world is able to get a handle on the inflation. I think there will
be different opportunities as the issues related to the global supply chains
diminish and as hopefully the Russia and Ukraine crisis sort of comes to an end
and we get control on inflation. If you looked at semiconductor production, previously
you focused on a certain part of the world. Well, that’s shifted today. So, I
think going forward you’re going to have to look at it from a broader lens. There
is a shifting that’s going on and so we’ll look at the newer emerging
opportunities that result from that shifting. Additionally, we are seeing
shifts in in terms of just the labor market. We are seeing a shift from things
that China was potentially involved in previously and that have now shifted to
other parts of Southeast Asia, for example. And so, as that happens, there is a
shifting of opportunities along with challenges, of course. And just because
there’s an opportunity doesn’t mean that we will invest because we’ll look at
the other side of that and what are the challenges and see if it makes sense.
But I think that’s how we will approach it.
MG:
Can you be a bit more specific on investment opportunities that might be of
interest?
SK: We will look for newer opportunities that are in the early stages,
yet growing, such as renewable energy. These are industries with a long path
and will see increasing investments as newer innovation and developments take
place. Where it makes sense for the Division of Investment to be involved in
order to capture these investment opportunities, we will look to do that.
MG:
What about areas to avoid or be cautious of?
SK: We are continuing to look at the underlying leverage levels in our
investments so as to monitor risk and ensure that leverage levels do not reach
high levels. We remain cautious of investments which require high levels of
leverage to deliver returns. We will also be careful to minimize investments in
sectors or parts of the landscape where there may be longer-term structural
changes occurring that may adversely impact our investments.
MG:
What are you hoping to accomplish in the upcoming 2022-2023 fiscal year, which
will start July 1?
SK:
Obviously, we don’t control markets. We haven’t changed in what we are
targeting with our objectives. Certainly, we continue to focus more on the
volatility today but nonetheless our long-term objectives, and I would even say
our medium-term objectives, remain intact. And so, from an investment
perspective, from a portfolio perspective, we have certain targets. We will
continue to move towards those targets. There are obviously challenges at this
point and I think sometimes not doing anything or not allocating is the right
decision. And I think we’re in that period right now, where having a pause
isn’t the worst thing to happen. And by the way, keep in mind the private
markets that we have committed to over the past year. I think it’s been great
timing because we made those commitments and now those dollars and that capital
is now ready to be deployed as the investment managers find opportunity. So
sometimes timing works in your favor.
MG:
Are there any investment sectors that you will put greater emphasis on in the
fiscal year?
SK:
As we look across our investment portfolios, we realize that we are
underweighted to investment managers and funds that are smaller or at an early
part of a fund’s lifecycle. In response to this, we have recently launched the
Emerging Managers Platform which will seek to identify smaller funds at an
earlier stage in the lifecycle within the private market space. There are areas
of the market which can be accessed quiet effectively and efficiently by
smaller funds and it would be in the pension fund’s interest to capture these
opportunities – the emerging managers program goes towards capturing these
opportunities. Additionally, the program will also enable the Division to
access more diverse and women-owned investment firms which also enables the
pension fund to benefit through greater investment access to underweight areas.
MG:
What about the administrative side?
SK:
We will focus on building the team and strengthening the processes that we have
and strengthening our team members. We will continue with training, education, and
rotating investment analysts and investment team members as well as other team
members within the different areas so that they can develop professionally and
contribute more as well as develop professionally. Obviously, we always focus
on performance, but also focus on the processes. So, our processes are very
institutional and nonetheless that’s not to say that there isn’t room for
improvement. There is always room for improvements. New technologies are
available [and]we are in the process of implementing some of those. And so
those are I think some of the things that are going to keep us busy bringing technology
to a higher level, implementing on those, looking at our processes, finding
improvements and then executing on that.