Investing Billions - E137: Lessons from Managing $300 Billion Dollars w/ John Skjervem (CIO of URS)

Episode Date: February 11, 2025

In this episode of How I Invest, I dive deep into a discussion with John Skjervem, Chief Investment Officer at Utah Retirement Systems (URS), to uncover the unique governance and investment strategies behind one of the most innovative public pension funds in the United States. John shares his insights on governance structures, private equity allocations, the benefits of a "fishbowl-free" decision-making process, and his approach to alternative energy investments. Whether you're curious about pension fund management or the future of disruptive energy investments like nuclear fusion, this episode is a masterclass in strategic thinking and long-term investing.

When we were last chatting that transparency with a T, capital T, was actually negatively correlated with returns. Why is transparency a bad thing? Most public plans, red or blue state, have what I call fishbowl governance structures, where the board conducts its business in a public meeting. These things turn into spectacles. Big auditorium, 150 people in the room, front rows media, second second row is lobbyists, third row is activists, fourth row is gadflies, fifth row is crackpots. There was never a John Q. Public responsible taxpayer. That guy never showed up. Double click on your asset allocation strategy.

So what are the buckets and how do you allocate today? Last time when we chatted, you mentioned that Utah Retirement Systems has the best governance of any pension fund in America. Double-click that. Yeah, that was a bold and brash statement. There's three components to that claim. The first is rare, but not totally unique. The second two are totally unique. So the first would be staff has full investment discretion below asset allocation. So the board sets asset allocation strategic targets for the asset classes and all implementation execution is delegated to staff. It's rare, but not totally unique. So as I mentioned, David, I'm an advisor to Alaska Permanent Fund Corporation, the CIO there, Marcus, and the staff, they have investment discretion, investment authority. There are a handful of programs throughout the country where staff enjoys investment discretion.

Contrast that to my time at Oregon, my discretion, $100 billion program, my authority as CIO was limited to $50 million. I'm not that great at math, but $50 million dollars divided by $100 billion is a decimal point with several zeros. My authority there on a discretionary basis was quite constrained relative to the size of the program. What that means is in a program in which staff does not enjoy authority and discretion, it means all the recommendations have to come in front of the board. Are there any benefits to that for the board? So obviously the trade off is that you kind of have your hands tied, you can't move as

quickly but are there any governance benefits to forging people to go to the board with investments? No benefits and only disadvantages to that structure. Disadvantages to the program, disadvantages to the beneficiaries, potential benefits to the board members. But I would I would characterize it as a highly suboptimal approach. Because as staff, you can work for weeks, months, quarters, potentially years on a transaction, on a recommendation. The gestation period on these things can really be measured in years in some cases. And so it's a very asymmetric dynamic for a board member

when you have staff who are, if not expert, much more expert than their counterparts on the board, having spent, again, weeks, months, quarters, years of their life on this transaction, and then a board member who maybe got off a red eye and read the material on the way over in the morning is forced to make a decision. It can be very discouraging for staff that not only have they spent years working on investment that gets ultimately rejected by the board, but also seems like it's somewhat of an arbitrary process. So very quickly the staff could get discouraged in terms of putting their best ideas forward. It can be demoralizing because it can appear capricious.

For Utah retirement systems, URS, you also have two other pillars to your governance. Walk me through those. The second pillar, which as far as I know is unique, is that for all investment matters, our board, when it comes to investment matters, the doors are closed. There's no public participation whatsoever. And that is what enables us to discharge our duties, I think, in the most objective way

on the merits of the investment, independent of the personalities, independent of the politics. I would say that is the number one ingredient to our success, is the opacity. There I said it, the opacity of our process is what enables us to be objective. And in my experience, the transparency of other programs is lauded for all the wrong reasons because it opens the process up to all sorts of actors and agents for whom the solvency of the program and the performance of the program is not the objective function. When we were last chatting that transparency with a T, capital T, was actually negatively correlated with returns.

Why is transparency a bad thing? Your knee-jerk or your intuitive response is for a public pension plan that transparency would be good. It's actually not. Number one, it is not public money. So the most important misunderstanding is that public pension funds are public money. They are not public money.

The money started with taxpayers, went through various municipalities, various instruments and organs of the state. But by the time it gets to me, it's owned by the beneficiaries. I'm a vested member of the Oregon Public Employees Retirement Fund. That money's mine. It's not the state of Oregon's. Number two, I'm picking on Oregon just because I know it well, but most public plans, red or blue state, have what I call fishbowl governance structures, where the board conducts its business in a public meeting. These things turn into spectacles. Big auditorium, 150 people in the room,

auditorium, 150 people in the room, front row is media, second row is lobbyists, third row is activists, fourth row is gadflies, fifth row is crackpots. There was never a John Q. Public responsible taxpayer. That guy never showed up. So here's another way I talk about it is Utah's opaque Oregon is transparent. Utah's a superior program for many reasons, but one of those reasons are because of the opacity, because I don't have to make the argument to you, David, that the elected officials on my board are more political or less political than the elected officials in Oregon.

I don't have to make that argument. They may be, or they may not be. It's moot because there's nobody for our elected officials to grandstand to. That is the key understanding. The key linkage is elected officials on the board, public meeting, activist lobbyists show up, boom, now you've got grandstanding. Investment staff shows up every day putting together a portfolio, evaluating investment strategies and evaluating managers.

Everything we do is to try and put together an investment portfolio that can successfully defuse those liabilities over the next 40 years. We are truly long-term investors. But we serve boards that are often comprised with or by elected officials for whom the time horizon is two years or four years. That is the fundamental mismatch. Their time horizon, their time horizon is two to four years to be re-elected or to move on to the next higher office. Our time horizon is 40 years. Boiling it all down, that is the fundamental mismatch. And it gets

exacerbated by the fishbowl structure that, you know, is the hyperactive third base coach waving in all these people, come on in, here's a mic, say whatever you want. Again, it's not, it's not who they are. It's what they represent. They represent constituents for whom an elected official has to pay attention to in his or her time horizon, which is two to four years that has nothing to do with my time horizon, which is four years. That is the fundamental mismatch.

So tell me about yourRS as asset allocation. You know, I, I know a lot about my peer programs because I've, well, I've been around, you know, I'm old and I've been around the, been around a while. I feel like I'm pretty fluent in what the public funds landscape is like. And I would say our program is unique in that it's probably the closest thing to an endowment in a public fund in that we have a very high allocation to private markets. We have a very high proportion of direct investment activities. What type of strategies or asset allocation would endowment

or a URS pursue that may be controversial to the public? Gets exposed in the fishbowl governance model as people come in and rail against private equity or they come in and they're rail against hedge funds because of the fees or because of the bill narrows. And that is across the board and that just reflects the lack of understanding of the structures and the asset classes.

Double click on your asset allocation strategy. So what are the buckets and how do you allocate today? And how do you expect that to change over the next couple of years? Managing a venture capital firm is complex. Fundraising, reporting, compliance, it all adds up. But what if there was a smarter way? Juniper Square is transforming the private market's investing experience. More than 2,100 GPs trust Juniper Square's connected software and services

in order to raise capital more efficiently, reduce operational risk, and deliver a world-class LP experience. Want the freedom to focus on delivering investor results? Visit junipersquare.com slash VC to get in touch with the Juniper Square team today. 14% private equity. Where we are unique is that a big part of that, as much as 50% of that is venture.

That's a legacy issue. A legacy issue in a good way in that the program went into venture capital 30 years ago, exclusively through fund to funds, and then has been successful in converting those fund to fund exposures to primary investments where most of the GPs honored the shelf space. We didn't have any dedicated staff to private equity until 2017. So it was all delegated through fund-to-funds and consultants.

But once we started to bring those allocations in-house, we were very fortunate to have most of the GPs save that shelf space for us. What was, what was it, you know, historically allocated to fund to funds was converted to primary exposures. And there were a couple of exceptions, but like I said, most of that shelf space was preserved. I know this comes off to you and your audience as braggadocia, but just by virtue of being in the asset class for that long, we've got a really impressive roster, uh roster in venture,

something that couldn't be replicated today because the access issues that you and your audience are familiar with. So 14% private equity, good part of that venture, fixed income at 20%, really plain vanilla, by design, deliberately plain vanilla, low 30s public markets, basically a global ag orientation. Would love to say we had a home country bias there, but we don't. Real estate and what we call EMIP, energy mining infrastructure, are probably the two most unique.

Real estate is unique in that we started migrating to a direct program. And this is timely because the director of that program, Devin Olson, just retired. We had his party last night after 40 years, four zero years in the chair. And he was really a pioneer and led the migration to a direct program out of funds into direct program. Almost 50% of our staff is real estate just because we own the stuff directly. We don't do the asset management. I mean, we don't do the property management, but we do most of the asset management. And so that's been terrifically successful.

We obviously save a lot of fees. And most of the attention on a direct model starts, particularly in the press and an interview like this, the focus is, oh, you save a lot of money. Well, that's true, but I think what's less appreciated and for me much more important is you control the holding period. And real estate assets are fantastic assets in a defined benefit program because they're long duration, they have a big income component, and of course they're indexed to inflation depending on

the property type. So it's really the ideal asset you want to own as long as you can in the DB fund versus a closed end fund model where you go in at six and you come out at four and everybody high fives because you're printing a big IRR. But then me, the CIO, I'm forced to reinvest in a four cap rate environment. In other words, people are looking good in terms of their investment performance, but it's not helping me in my ultimate missing, which is to defuse liabilities across 40 years. The other, this EMIT energy mining infrastructure portfolio, it's unique in that it's got a

big oil and gas exposure. Some of that is direct. Most of it is outside of a traditional fund structure and it has performed fabulously well and done exactly what it was supposed to do, which was provide inflation protections. Utah retirement systems today, your job is to manage more than $50 billion. What are the advantages of having $50 billion and what are the disadvantages? The financial services industry is evolving rapidly. Reed Smith's team of over 200 financial industry group lawyers helps clients navigate the complexities of the sector in an era marked by technological advancements and AI.

Reed Smith's lawyers have a deep understanding of market dynamics, legal frameworks, and regulatory developments and advise financial institutions and technology companies on financing, lending, investment management, restructuring, insolvency, and litigation. So it's a lot of money and I don't want to dismiss that at all but it's the restructuring, insolvency, and litigation. So it's a lot of money and I don't want to dismiss that at all, but it's the smallest program that I've run in the last 20 years. So, you know, I was CIO of the wealth business at Northern Trust and even 15 years ago or whenever that was, you know, that was $180 billion. And then Oregon was, when I left, it was $111 billion.

So this is a much smaller program. And smaller is better. And so the access and the agility of being small at a place or smaller at a place like Utah, those benefits way outweigh whatever scale economies you're giving up on the public side. So it's definitely a trade-off, but I would, again, net, net, net, the access and agility in private markets that accrues to being small is much more valuable in dollars and cents than the scale economies that you get in public markets for being big. If you had your choice, what would be the ideal check size that you would want to work with in the private markets?

Oh boy, it depends if it's energy, if it's venture, if it's private equity. It's very different in each of those. Um, we're doing, uh, you know, we've within the, within the energy portfolio, we have a carve out to what we call alternative energy. Basically it's, it has a twofold purpose. Number one, to provide an explicit hedge to our traditional oil and gas investments as when and as society decarbonizes so it's an explicit hedge but it's also designed to participate in the energy transition so we want to play defense against our traditional stuff but we also want to play offense and help facilitate the

energy transition and that portfolio is nascent, you know, maybe third inning. Um, but it has five direct investments in fusion. So it's really all over the map. You know, um, you're lucky to get into a top tier venture capital and write a $10 million check. We would rather be with the A team, even if our allocations are smaller, than be with the B team and just be able to write a bigger check. Outside of your work at ERS, you also have several unpaid advisory or investment committee positions at Alaska permanent fund at the state

pension of Idaho at I triple E, which is a foundation, why take on these roles and what benefits accrue to you as being involved in these organizations? Thank you for listening to join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe. Oh boy. Great question. please click the follow button above to subscribe. Oh boy, great question.

Taking on the role of several of my peers, I'm with several of my peers on those organizations. So of course that's fun. Because the governance structure in those organizations is different, because the investment objectives are different, because the boards are populated with different types of people and because my fellow advisors are different, I gain insight every single time I participate. And that insight ultimately accrues to the URS beneficiaries, to the URS staff, to the URS board by Sherwin's got one more experience that taught him we ought to

think about X and we ought to try and avoid Y. Professionally it's been very rewarding, but I absolutely believe, have a complete clear conscience that it makes me a better CIO for the taxpayers of Utah and for the beneficiaries of URS. And I'm, I'm pretty vigilant in monitoring that. One of those roles, Alaska Permanent Fund, also very unique governance structure, very cutting edge organization. What do you see as some of the similarities between Alaska Permanent Fund, as well as Utah retirement systems?

Alaska Permanent Fund is really as Utah Retirement Systems? Alaska Permanent Fund is really important because it's America's largest sovereign wealth fund. It's important for the country because it's America's largest sovereign wealth fund. It's important for the state of Alaska, obviously, because it's the biggest single asset, biggest single financial asset of the state. I'm really proud to serve there

because it is such an important organization. It's such an important fund. The governance structure is quite different than ours. It is very much a, and I don't use the term fishbowl in derogatory or pejorative, but it is very much a fishbowl governance structure. It has no direct elected officials, but there are political appointees. So it's not then dissimilar to the majority of its peers. So we have those governance dynamics where it's similar to URS. And I think key to APFC success over the years has been the delegation of investment authority to staff.

And it has been very gratifying for me, I'm five years into my service up there, that the commitment to that delegated authority has never wavered. It's what makes the size, but also the delegated authority is what makes APFC such a potent investor. You mentioned when we were last talking that 74% of your staff was not working during the global financial crisis. What key insights did you gain from the global financial crisis of 2008? We have very little credit. That philosophy was validated by the GFC.

So it reinforces my own philosophy, which again is happily consistent with URS, which is we'd rather take our equity risk into equities, especially, and here's the, I think this is an important distinction is it also depends on your program. If you're URS and you have access to, you know, the A team venture capital roster, why wouldn't, why wouldn't you spend your equity risks there? Why would you spend it in where you can,, I'm making the numbers up, but you can earn

25% as opposed to stretching and fixed income into private credit to go from whatever mid single digits to low double digits. I think the translation is if you're like me, if you're a CIO, you think about it in risk budgeting terms. You don't have an unlimited risk budget. Your board gives you 100 points of risk. Why am I going to spend any of my budget on private credit if I've got a world-class venture capital portfolio. That's where I'm going to spend my risk budget.

And I'm going to design and manage my fixed income for the sole and express purpose of hedging equity risk in a deflationary environment. What are some interesting structures or interesting investments that you make that are maybe very risky but have very high returns potential? Probably the best example would be our Fusion portfolio. We've got a portfolio of five Fusion investments. Those are very, probably binary, either a zero or a hundred X because Fusion is the

Holy Grail. I'm much more bullish on fission because I think that is a much closer path to a clean energy alternative, particularly with some strategies that are either at or near approval. Whereas, you know, fusion is still the Hail Mary Holy Grail. But man, when it works, and I don't know if that's five years, ten years, thirty years, but when it works, it's a game changer of gigantic magnitude. You know, it's not a lot of money, single million check sizes, but the payoff is gigantic. I assume you have 20 million in that category at 100Xs, two billion dollars, it moves the needle for a $50 billion fund.

It moves the needle and it also protects against, you know, the, the couple billion dollars in conventional energy strategies that will suffer in that environment. When you look at investing into something very disruptive, like nuclear fusion, are you always looking to make a directional bet or are you sometimes picking this is the one company that I think is going to be the one. Great question. We're not smart enough to know. So that's why I described that portfolio. We actually called the Utah alternative energy portfolio as very early innings in that we're deliberate in getting as many, um, pieces out on the board because we, we don't know.

What do you want our listeners to know about you, about URS or anything else you'd like to share? I tell people I'm the accidental CIO. I graduated from business school at Chicago and beat a path to Santa Barbara, you know, because I wanted to surf before work and coach my kids soccer games after work, I accomplished that. I did that. But then, you know, all these years later, I wound up as a CIO, institutional CIO. Well, it's certainly a big time CIO and really appreciate you taking the time

and look forward, Salt Lake is beautiful. Look forward to sitting down there or in New York City very soon. Yeah, you bet. Thanks for having me.