By Muskan Arora
With an instinct first and data second
ideology, CIO Molly Murphy of $24.5bn Orange County Employees Retirement System
looks to Warren Buffet every time there is a market correction to have cash
when it “matters the most and to be able to deploy it boldly”.
Murphy, who joined the pension plan in 2017,
has been responsible for its growth from approximately $15bn to $24.5bn, as the
system remains in a favorable cash position.
Holding a background in bond markets,
Murphy has developed a habit of looking into “the worst-case scenario” with
every investment, and pairs it with maximizing optionality.
“That really cuts through the noise because it’s
hard to pair those two things together as you have to take risk to get
optionality,” said Murphy in an exclusive interview with MG.
The fund returned 17.7%, 6% and 9% for its 1-3-and
5-year time period against a benchmark of 17.1%, 5.6% and 8.6%, as of September
30, 2024.
For higher returns in public equities, the system has
moved towards a core-satellite approach, moving away from overly diversified
managers to pairing passive indexes with highly concentrated funds.
While public equities have driven alpha for the
plan, OCERS is focusing on building the private credit and infrastructure
portfolios, alongside expanding the venture capital sleeve.
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For the past five years, OCERS has been moving
towards asset-based lending, which is now into broader credit platforms. The
system is also eyeing allocations within specialty finance, niche sectors and
alt-collateral strategies.
“We get really comfortable with underwriting risk
and then we’ll stretch into areas that need our capital. I think that’s how we
get our optionality,” added the CIO.
Within credit, OCERS has progressed from unsecured
direct lending to traditional asset-based lending, and has now expanded into specialty
collateral, such as intellectual property, royalties, and SRTs.
About six years ago, the pension plan
started moving their real estate holdings into infrastructure as real estate “isn’t
the pure inflation protection that people want it to be.”
From a 12% allocation to real estate, the pension
plan now has 7% allocation to the sleeve, with a 5% allocation to
infrastructure, which they plan to continue growing.
Similarly, OCERS has grown its private equity allocation,
which has more than doubled in the last six years, as the plan was able to
identify it as the highest performing part of the pension portfolio.
While OCERS could have expanded its allocation
beyond the current 15% of assets under management, “we didn’t want to ever become
forced sellers into distressed markets to raise liquidity or offset the
denominator effect,” said the CIO.
However, to stay on top of uncertainty, the pension
plan has started using the secondary market as a regular health mechanism for
the portfolio.
To have the power to fire up things when required,
starting last year, OCERS actively buys and sells on the secondary market. They
now have four secondary brokerage platforms that they interact with each year.
When speaking about venture capital, Murphy focuses
on the subset that is creating the unicorns and participating consistently in
the upper quartile of the VC market.
“It does take a lot of work, and you have to write
smaller checks sometimes to just get your foot in the door,” said Murphy, on finding
multi-generation assets if VC is done right.
Collaboration has become a theme. In 2023, OCERS seeded Collective Global, a
new platform bringing large institutions together with the global innovation
economy. Collective Global, OCERS and others
in the LP consortium have come together to prove that a “win-win” situation can
be created when pensions and other large pools of capital invest in, and
alongside, venture capital firms and support portfolio company founders directly.
While looking for new ideas, the CIO focuses on
whether they are positioned in the right part of the market and managed by people
she respects within space.
“It’s about the right ethics, the right background,
the right part of the market, the right product for us,” added Murphy.
