Simon Brewer 02:06
We've been exploring the world’ssuper allocators whose immense size of assets offers potential buying power andaccess. It could simultaneously suggest rigidities in layers ofdecision-making. But we're learning how different these large institutions arein approach and dispersed in investment decisions. To help complete ourunderstanding, we're going to examine these questions through the prism of oneof the largest US public pension plans, the New York State Common RetirementFund, over $250 billion dollars in assets and more than 1 million members. Andto help us explore their purpose, decision-making, investment approach andexecution, we're going to NewYork, and I'm delighted to welcome AnastasiaTitarchuk, if I pronounced that correctly. Anastasia?
Anastasia Titarchuk 02:59
I think you did very well, Simon.Thank you for having me and thank you for the pronunciation.
Simon Brewer 03:05
I have to ask you, it's a greatname. Tell me the origins of that name.
Anastasia Titarchuk 03:09
Well, I don't know if I could sayit nowadays, but I grew up inRussia until I was about 14 years old.
Simon Brewer 03:16
You can certainly say that. That'sabsolutely fine.
Anastasia Titarchuk 03:20
But the last name is Ukrainian, incase I need to balance it out.
Simon Brewer 03:23
Right. Well, perfect. Well, let'sstart with your education. I see that you studied maths at Yale and succeededwith many distinctions. I'd just like to know, why Yale?
Anastasia Titarchuk 03:35
It was by accident, if I could behonest. I actually have a twin sister who went to Harvard and we applied tofour schools. Three were the same, and then I think we both decided let's tryan Ivy League school at the time.And at the time, there was no commonapplication, I don't think, or maybe it was in the infancy so it actually waswork to apply to different schools, and it cost money so we picked four. Oncewe both got into Yale and Harvard, there was a lot of pressure on us and myparents to send us there. So that's why, by pure chance, I went to Yale and shewent to Harvard.
Simon Brewer 04:13
Did she study maths as well?
Anastasia Titarchuk 04:15
I believe her major was computerscience.
Simon Brewer 04:19
Okay, well, that's good. You hadsomething else to talk about at the dinner table other than maths. So whatstruck me was you have made that transition in your career from sell side to buyside. So let's just start out because I see what appears to be an equityderivative specialist at JP Morgan and then Barclays Capital and Bank ofAmerica latterly, before you changed roles. What drew you to the sell side ofWall Street?
Anastasia Titarchuk 04:45
I initially went to sell sidebecause once you get to some of these Ivy League schools, there are a fewpopular majors. There's the pre-medtrack, the Econ track, the Poli -Sci, theconsulting track. So very early, you get exposure to things that I didn'tnecessarily know about before college. So when I entered college, I actuallywanted to be a chemical engineer and then I figured out that it wasn't theplace for that. And honestly, financially, it was much more lucrative to go tothe sell side. And I got a little bit of the sell side experience from my oldersister who was working for banks. Initially, my interests came naturally. Iliked finance, I liked economics. I always paid attention to global markets andpartially it was because I was still very recently an immigrant to the States.So of course, I cared about what was happening in the rest of the world. Soearly in my career, I had an internship in emerging markets for that reasonbecause I cared about Russia and the rest of the emerging markets. And then itsort of naturally evolved. Once I had the internship at JPMorgan, they gave mea full-time offer. Derivatives were the hot thing at the time of any kind,credit or equities, and with a quantitative background, it was a more natural placefor me to go to. So that's really how I ended up on the sell side.
Simon Brewer 06:16
It looked to me as if you wereLehman's when the crisis unfolded.If that was the case, I wonder whatreflections you have of that traumatic time.
Anastasia Titarchuk 06:25
That probably transitions wellinto one of your other questions, how I made the change from the sell side tothe buy side. I was at Lehman, and honestly, the timing was poor, but I thoughtit was a reasonable career decision for me to make at the time. It was a rolethat required building some new businesses and having a bigger teamresponsibility. But obviously, the timing wasn't great. And then I did make thetransition to Barclays. But my business of complex structured products wasn'treally popular during the GFC or immediately after. And then I spent a year atBank of America. But essentially, as I look back at those three years or so, Ithought, well, I haven't really made any money and I really don't enjoy what Ido anymore, so I'd like to do something else. And as everybody probably knows,when you start talking to people about changing careers, it's hard because arecruiter is always going to want to put you into the same job that you weredoing before. That's the easiest thing. The easier way to do it is throughnetworking, which is still hard. And making the transition from sell side iseasier to the buy side if you're going to a public institution. There arereasons for it, pay being one of them. I got introduced to New York Common throughone of my old bosses atLehman and the rest is history. Now I've been here for11 years.
Simon Brewer 07:58
What struck me as well is thatthis fund is widely regarded as one of the nation's best-managed andbest-funded pension plans, and I wonder whether you could set the stage aboutthis organization.
Anastasia Titarchuk 08:12
So there are a number of reasonsfor it. But historically, I can't take credit for all it because it was apioneer in some of the alternative asset classes and it was a pioneer of abalanced approach to investing, now we're talking back 30 years or so. And italways had very professional management. We've had bumps along the way, butit's worked. It's a unique state in that it's a sole trustee structure. So thecontroller is my boss, and he is the sole trustee who delegates investmentauthority to me, but he does sign off on every investment that we make. I thinkthis trustee has been around for all of my tenure, and he's very reasonable andsupportive oft he investment organisation, and that definitely contributes tothe organisation's success. The other big component is the structure of theNewYork State Constitution. By law, the state cannot skip the contractuallyrequired funding for the pension fund. So unlike many of our neighbors andpeers, we're fully funded because we never took contribution holidays. So asour fiscal year end, which was in March, we were over 100% funded. That's goingto come down a little bit this year because we have taken some write downs,especially on the public equity side, but it's still going to be one of thebest-funded pension funds in the States.
Simon Brewer 09:47
So having been an alumni of Yale,I have to ask you, did you study with, learn from, or have you followed at allthe lessons of the late great David Swensen?
Anastasia Titarchuk 10:00
David was very kind with his time,and he did actually sit down with me unfortunately not long before he passedaway to talk about investing int he fund. I shared our investing approach andhe talked a little bit about his.His verdict was that we take a very reasonableapproach to investing. A fund of our size is very different than an endowmentof a fifth of the value perhaps, or any kind of large-size endowment that youcan think of. There are both advantages and disadvantages. Sometimes because ofour size, we can driveterms, but we also can’t be as nimble as an endowment canbe, and we have other restrictions by the virtue of being a public entity.
Simon Brewer 10:50
So set the investment goals,please, so we can understand what we might refer to as the strategic assetallocation or at least the requirements of your asset allocation.
Anastasia Titarchuk 11:00
So we have a 5.9 actuarialexpected rate of return, which again, for a US pension fund is consideredreasonable. It's on the lower end of things. So the goal is to meet that returnwith the least amount of volatility with the restrictions that we have on ourinvestments. And some of these restrictions are serious. We used to be limitedto essentially no more than 25%in alternatives, and even had restrictions thatwe couldn't invest more than10% in international equity. We've just had thatlift a little bit. So that restriction is now 35%. So all of your alternativesgo into what we call a basket. That's 35%. So, again, that gives us a little moreflexibility. But that will prohibit us from ever looking like an endowment thatmight invest 50%of their assets in private equity, for example.
Simon Brewer 11:57
Yes, I think that Yale even todayhas less than 20% in public equities. So presumably, your large allocations areto public equity markets and public debt markets. And so the question thatfollows is, active or passive?
Anastasia Titarchuk 12:11
For the most part, we take theapproach that in developed markets, we will be passive because we think alphais hard to come by, and we’ll be more active in markets that we considerinefficient. And we tend to outsource the active management to outside funds.
Simon Brewer 12:32
And so therefore, am I right insaying that this important allocation to private markets is where more time isspent on manager selection and on the particular investment categories?
Anastasia Titarchuk 12:47
That's fair. Another way to thinkof our private and public allocations is our global equity is going to be thelargest driver of nominal return, but something like private equity is expectedto have the highest absolute return.
Simon Brewer 13:05
So tell me a little bit about howyou approach that whole private equity space, because we've seen very differentvariations from the sovereign wealth funds and from other pension funds likeOntario Teachers'. Just describe how you go about it.
Anastasia Titarchuk 13:18
So we have today about a 15%allocation to private equity. The most important thing for us is to haveconsistency, because we've all lived through many market downturns and ourhistorical experience shows us that for a fund like us, we can't really markettime anything and especially we can't market time private equity. So we try tohave vintage year diversification. Andwe also have done historical analysis ofwhere we've done well and where we haven't done well. So given our size, we'realways going to invest in some ofthe big players, that's sort of our beta, andthen we try to have alpha on topof it. And we're pretty agnostic where in theworld we'll invest but certainly,maybe because of my personal biases, I tend toinvest less in places where therule of law, let's say, is less clear. And wehave a pretty large co-investmentprogram. One of it is run by a partner, but wealso have separate co-investmentvehicles as well.
Simon Brewer 14:33
It struck me that the veryinteresting and very clear strand within your investment thesis is real assets,which is particularly topical aswe deal with an inflationary impulse whichmight prove to be more than a transitory thing. How have you approached realassets?
Anastasia Titarchuk 14:49
So real assets in the lifespan ofour fund is relatively new for us. We started the program about 10 years agoand we've been very ramping it up. We definitely started it and I think we'renot unique in that with a thought of how can we have a differentiated stream ofreturns, and something that may also help us in an inflationary environment. AsI sit here today, I wish I had a larger portion of the fund in real assets.Now, both from a standpoint of developing a new asset class but also because ofour restrictions, we couldn't get much bigger than we are at today. We mightgrow it a little bit because now we have a little bit of flexibility in that35%basket, but it's hard. It's hard to be a large fund and protect yourselfagainst inflation.
Simon Brewer 15:42
So what's in those real assets?
Anastasia Titarchuk 15:44
A lot of our real assets programis infrastructure. We're not big investors in traditional energy. We haven'tbeen. We have various types of infrastructure, not just traditional things, butlet's say digital. And then there are other things that we don't like to investin. We are not a commodities investor, so we don't have that. And we have alittle bit of agriculture.But again, we sort of tried it for size, it hasn'tbeen clear that there's a very strong case for us to do Ag, which is why theportfolio is mostly infrastructure.
Simon Brewer 16:22
Can you give me some examples ofthe types of infrastructure investments that you prefer?
Anastasia Titarchuk 16:27
It depends. There's coreinfrastructure, which will take very little development risk, and that's a lotof contractual cash flows. I don't think we're particularly for or againstanything other than we're not big investors and traditional energy, but we'lllook at cell towers through funds, we'll look at toll roads, airports, whateverit might be.
Simon Brewer 18:43
The other strand is that you seemto have an emerging manager program. Tell us a little bit about how you dealwith your size and then for itto make sense when you go to emerging managers.
Anastasia Titarchuk 18:59
So on this front, I would alsolike to think that we were a bit of a pioneer because we were doing itcertainly before my time and before it was popular. It's something that thecontroller is very passionate about. The idea of the program is really the doublebottom line, as the controller likes to say. One, we believe that emergingmanagers are just naturally hungry. When you're on fund one or just startedyour business, I think there is that extra incentive to make sure that yousucceed. So that's an argument of why an emerging manager would outperform. Andthen the second bottom line is we do want to promote women and minorities tothe extent that we have. So that's the historical genesis of that program. Itstarted initially, I believe, inequities and private equity and developed overthe years. We've also developed how we do it. We've learned. Early on, I thinkwe mostly tried to do it through the fund-of-funds model. But then as weevolved and some of the alpha became harder to find, we realized that we neededto change the fee structure a little bit so we weren't losing the benefit ofthe extra returns from emerging managers by let's say paying an extra layer offees to fund of funds. So we still use fund of funds. They're structured alittle bit differently. Sometimes we go direct, sometimes we structureco-investments and other vehicles to help us drive return in that program.
Simon Brewer 20:33
How do you find them and how dothey find you?
Anastasia Titarchuk 20:36
Actually, the timing was a littlebit fortuitous. We just had our emerging manager conference in Albany. Wealways have it in mid-February, so that's an annual event. We had about 800people who came to our events, but that answer is how do they find us. If youwant to find us, we hold a really big event every year, and obviously, that'sthe best way to meet the staff and our partners. We walk all the asset classesthrough how we structure the emerging manager program, who the program partnersare, how it works, what we look for. So that's one way, but there are ways tofind us other times of the year as well. First of all, this controller is verypassionate about transparency. So that means a lot of the information isavailable on our website. Our website has our annual report, it has ourholdings, it has the asset classes that we have. There's even a listing of allof our fund investments, so someone can get an idea of size from there. Andthen on the emerging manager front, I have a team of people that's dedicatedjust to emerging managers and they work with relevant asset classes.
Simon Brewer 21:49
Got it. Now, we are perhaps inthis changing investment climate.You've talked about size being a realisticchallenge to move your asset allocation substantially. How have you gone aboutthinking about what might be a changing investment climate and what are youdoing in response to that?
Anastasia Titarchuk 22:09
Size is definitely a challenge. Ialways tell the people that I don't think a public fund like ours, of our size,can be nimble. So it's very hard to turn the ship around. It's sort of like asupertanker. So market timing doesn't really work for us. We don't have theskills internally to make macro calls, and we're slow. So even if I had a bitof a macro edge, you have to be right twice. You have to be right in both yourbuy and the sell decision. So we tend not to really do it. Where we do it is wedo it on the margins. Now, as we've just talked about, we might look toincrementally increase our real estate or real assets allocation within ourconstraints. We will look to adjust our allocations within an asset class. Sofor example, what that means for me right now is in private assets, there'sless capital available this year and a lot of it has to do with the fact thatpublic assets have sold off. So a lot of people suddenly have alternative allocationsthat look much bigger than the plan. So fundraising environment for even thebest funds is more difficult. So that puts somebody like New York Common into abetter position to negotiate, to get access, to co-invest, etc. And we mightlook at strategies that we wouldn't otherwise consider because maybe theywouldn't be open to us or our size, but we might consider them now because ofthat.
Simon Brewer 23:45
So I'd like to turn to a questionraised by Luba Nikulina, who we both know. She kindly introduced us to you andshe was a guest when she was atWillis Towers Watson. She's now at IFMInvestors, an Australian organization that's actually owned by 17 world'sleading pension funds doing some very interesting work.
Anastasia Titarchuk 24:03
That's right. And we know them.
Simon Brewer 24:04
Great. So she raised the questionof ESG, because we've had this recent, I suppose, we use the word spat wherethe Department of Labor unveiled this rule in the US that allowed retirementmanagers to consider ESG factors and then President Biden has been pushing forinclusion. There's been some pushback on this. So what's your take on the worldof ESG and how you want to interpret and incorporate it?
Anastasia Titarchuk 24:30
So I think ESG has become verypoliticised, and that's not a debate that I want to venture into because that'snot my area of expertise. I want to invest, not create political waves. But theway the fund has approachedESG is to say look, ESG is important and you shouldevaluate ESG factors when they're relevant. So our approach is not to say thateveryone has to evaluate themselves on every single ESG factor. But the way Iwould describe it is, look, if there are two companies that essentially havethe same revenue, they have the same business model, and one company is dirtierthan the other, well, which one would you pick if they're identicalinvestments? So that's where it matters. And it matters. Maybe it's notrelevant to you because your jurisdiction doesn't care right now, but it mightbecause it's getting a lot of attention. So that's how we approach it. And thenwe do think that there's a lot of greenwashing in funds that claim to invest onESG principles, and we're not even sure what that quote means, that perhapscharge higher fees that are not justifiable by returns. And I think that is oneof the reasons that a lot of regulators here in the States and in Europe arepaying attention to the proliferation of these funds.
Simon Brewer 25:59
So as you look out for the nextfive-plus years, what would you expect to be some of the maybe less expectedinvestment themes that come to play, and along with that, how you might wanteven the margin to tilt the fund?
Anastasia Titarchuk 26:17
I think that's a really hard call.It's clear that we are going to invest a lot of money in the green transition.What that means, I don't know. I think there's a lot of focus right now onrenewable energy, and that will come into play. But I also think that humanbeings are incredibly innovative. So I think we will also figure out how todecarbonise in other ways. So carbon capture is I think something that's quitereal, and things like nuclear on a smaller scale might come back as well. Sothat could be a theme.And I think the younger generations, the generations thatare perhaps in college or just getting out of college now really care aboutsustainability and working with a purpose. So I think that generation willdrive that theme as well.
Simon Brewer 27:13
And in this global portfolioyou're running, which obviously has the US liability at the end of the day, howdo you think about currency risk?Or do you not think about currency risk whenyou venture overseas?
Anastasia Titarchuk 27:25
So we do think about currencyrisk. The number one question thatI ask the team when we invest overseas is,what is the purpose of the overseas investment? Because if I'm going to get thesame return but I'm taking additional currency risk, that doesn't necessarilymake sense for me unless I'm getting a diversifying stream of returns. And tobe honest, if we're investing let's say in a private equity fund in Europe,it's not always diversifying to the US private equity because you're going toget some global growth beta in there and then you'll get alpha differentiation.So there has to be a reason for me to go overseas, then we could considerhedging. We haven't for a couple of reasons. One, hedging the currency riskwould count towards that basket. So it's expensive. Essentially, the way Ithink about our basket, it's like a really expensive balance sheet. It betterdrive return. And in the developed world, hedging currency risk, it does reduceyour volatility, but the expected return is zero. So a long answer to say wedon't hedge.
Simon Brewer 28:38
I've got it, but I'm not sure Iunderstand that expected return is zero. Just help me see that.
Anastasia Titarchuk 28:45
Well, I think long term, if you'relooking at let's say yen, euro and dollar, you don't expect it to appreciate ordepreciate over 10 or 20years. Like a currency hedge fund, yes, they'll makebets. They'll typically be shorter-term bets and you hope that they have alpha.I'm not sure that there is long-term depreciation of developed currencies. It'sdifferent in the emerging world because you routinely have massivedevaluations. And one can make an argument or can have a spirited conversationI think with me or anyone else now that maybe we're in a different world nowbecause all of the developed economies have printed a massive amount of moneyover the last decade or so.
Simon Brewer 29:34
Right. So I'd like to move to somegeneral questions, if I may.Having worked on Wall Street and having moved fromprivate to public, what's the biggest challenge that you found?
Anastasia Titarchuk 29:47
It's very hard to make thecomparison. On Wall Street, I think a lot of the challenge is you literally getevaluated every day. And I would say the bank, regardless what your functionis, it's all about making the dollar every day. When you head an asset manager,it's all focused on the long term and you tend to be the client, a verydifferent relationship. You do have other clients that you could say, well, mypension here is on my clients, I'm trying to make the best return, but it's adifferent pace of life. I think also working for the state versus working forpublic pension funds would be very different. Some of the people that I seeadjusting from a Wall Street environment to pension fund environments strugglebecause the pace is different. On WallStreet, it's kind of like get the dealdone, get the deal done. Here, we might talk to somebody for a few years beforewe make an investment. There are challenges of both worlds, you just have tonavigate them.
Simon Brewer 30:52
Got it. One of the things aboutthe investment world alongside others is just the sheer information overload. Iwonder what disciplines you put in place to manage that.
Anastasia Titarchuk 31:02
So I would say informationoverload might actually be an advantage when you're sitting at New York Commonbecause when you're on sell side, you're generally fed your own research, andthat's one perspective. Here, you have all the research available to you andyou can also pick up the phone and literally talk to anybody in the world. Youhave a general good perspective on what goes on in real estate and fixed incomeand equities, whatever you might look at. And then I think like all of us, wechoose the information that we absorb. So I tend to read a lot of macroresearch. But I have three or four providers, I like them for certain things,and I focus on them. And then on the asset side, again, you try to synthesisewho gives you what and how. There are certain people that are going to be verysalesy, and you have to know that, and there are others that are going to bevery informative. So I think that's what we do. And then when it comes todeveloping new relationships, it can be a challenge because at any givenmoment, there are probably hundreds of funds that are fundraising and it's notrealistic for me or anyone else on the team to know them all. So I'm lucky thatI have a good team that can synthesise a lot of information before it comes upto me, but it's challenging.
Simon Brewer 32:27
You talked about supportingemerging managers. What advice would you give to young people, young women andyoung minorities thinking about finance as a business?
Anastasia Titarchuk 32:36
One of the issues that we have andwhy there aren't more minorities and women is there are not enough of us on asenior level to serve as role models. But I actually think the desire to havemore women and minorities is out there. Women might be an easier one because alot of men who run shops have children and they have daughters as well so theywant to give them as many opportunities as they can have. But I would say justgo for it. IfI look at the incoming classes for banks, for example, they tendto be pretty diverse. It's higher up in the ranks where it gets harder. It's achallenge because as we get older, we evolve. And I can speak as a womanbecause that's my experience, balancing a family and moving up in some of theseorganizations, it's not the easiest thing to do in the world.
Simon Brewer 33:40
Got it. Now, you meet lots ofpeople who are great investors, you meet people who are running corporations,who's the one person that you'd really like to meet that you haven't met yet?
Anastasia Titarchuk 33:51
I don't know. I meet so manypeople. If I really want to meet somebody, I'd probably meet them via all thefund relationships that we have. I can say that it's not one person, but Isometimes like to meet politicians.I've met former presidents. I haven't metthis president, but it would be somebody like that. It would be a president ofa country. It could be US or somebody else. I say that because this is theworld that's so different from my day-to-day that sometimes I just like to seehow the sausage is really big versus like you read in the paper.
Simon Brewer 34:28
If you could wake up tomorrowhaving acquired one skill that you lack currently, what would it be?
Anastasia Titarchuk 34:34
I'd like to be a better publicspeaker probably. I do plenty of interviews on plenty of panels and I thinkthat's always easier. But when I have to give a speech, I have to be honestthat the first few minutes, I'm always a little nervous.
Simon Brewer 34:50
Yeah, well, you're not alone withthat. But it's true that practice does help in this particular business. Well,that's been really interesting, Anastasia, to be able to understand what alarge organization like the New York State Common Retirement Fund does. Itslimitations in the sense of size can be an asset and a disadvantage. But Ireally enjoy the fact that you shared your view of the world and the realismthat you have to apply as well.It's going to be very interesting for people whoare listeners of the MoneyMaze Podcast around the world to compare yourapproach to some of these other very large super allocators. So thank you verymuch for your time today.
Anastasia Titarchuk 35:29
My pleasure. And thank you forhaving me, Simon.
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As we continue exploring the world’s “super-allocators”, we’re learning how different they are in approach and dispersed in investment decisions.
In this episode we examine these questions through the prism of one of the largest US public pension plans, The New York State Common Retirement Fund, with over $250 billion in assets and more than one million members (as of 31/03/22).
Anastasia explains her switch, after several years, from sell-side to buy-side, and from private to public. She discusses why the Fund is widely regarded as one of the nation's best-managed and best-funded pension plans, their objectives, restrictions and where and how they prefer active over passive.
She describes the infrastructure component, real assets, PE and overseas investing as well as why emerging managers are considered an important element in their portfolio construction. Finally, she acknowledges the limitations that come with managing such a large pool of capital in terms of mobility when compared to an endowment, but equally explains their reach, reputation and results.
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