A Conversation with new Calstrs CIO Christopher Ailman

Today, he outlines goals for the fund, and his first moves.

There are unique challenges as you get larger and larger in asset size, it gets tougher and tougher to move around the markets. That’s why you don’t come in and make dramatic shifts. Over time, it’s more a course correction as you’re moving.

– Ann Bidou

As I said, they have made significant changes under Patrick's leadership in the past three years and are doing well. If you came in and took a team that was mediocre, and suddenly got them up to where they were making the playoffs, and you come in as the new coach, you're not going to rejuggle the whole lineup overnight. I guess the only new reality they need to understand is I'm the new Chief Investment Officer and they'll continue to work closely with the staff there that they do, particularly external managers working with Elleen Okada. She works with the external equity managers and will continue to. I believe in letting my staff do their jobs. I've been in their shoes for a long time. You want to be treated like a professional, and given the tools and resources you need to do your job, but then left alone to get it done.

Are you going to be focusing on using more California-based managers and investments?

I didn't get that sense, unless the Board directs me to do that. I'm going to go find the best managers, wherever they are. My job, as far as I know right now, is just to make money.

What prepared you to make this momentous change in your career?

Another person I really admire a lot is Steve Meyers at South Dakota. He's the Chief Investment Officer there and has been there for twenty-five years. Steve is one of the few people that's really brought a business mentality to the public pension business, which is what I hope to bring to CalSTRS. We're an investment management company and we need to act and operate like that. We need to have a five and ten year business plan; we need to merge our investment plan with our budget and put the people and resources where the return needs to be. Steve has done that in South Dakota and it has been very impressive. He's a gentleman, an outstanding person, and a very solid leader in the pension business overall.

There's a guy named Ken Meyer at Lincoln Capital in Chicago; Ken is a tremendous guy who takes time out of his day to periodically talk with me. He has taken time for minority kids, helping them get into business school, helping them move along in their careers. I think the real value we're going to add on this Earth is how we treat each other and how we help each other.

Are you planning on "giving back" in a mentoring fashion?

CalSTRS has been real good at that already through the Bob Tuego Foundation, and I would fully embrace maintaining that in a big way. We don't have a lot of awesome business schools in Sacramento, but they've used summer interns, and I think that would be outstanding. I'm also excited because there's a staff of fifty, over thirty investment professionals; it will be fun to be involved in their careers and see them grow. We've had turnover here at Washington, and in almost every case I can say that person grew while they were here. The alumni of the Washington State Investment Board are in some very prominent positions in the industry, and we're proud of that.

The hardest thing in this day and age is to be able to compete, and retain and hire people in this environment. We just looked at some demographics yesterday in terms of the Baby Boom, and I think we're going to be in this tight labor market for a period of time.

Where do you hope to add the most value?

I think from a leadership standpoint, working with the investment staff. I hope to try and build some stability in the CIO position. CIO positions around this country turn over too often.

Also, public funds are constrained being in the environment they're in. The bottom line, we're all multi-billion dollar investment management organizations. But we operate inside of a governmental framework that's kind of a flawed business model. So you're going to have problems within that business model, and it constantly shows up in the fact you can't retain quality people for very long. That model is not going to get changed overnight.

You've seen money management firms created inside of banks and pretty soon they realize they have to move independent because they can?t pay the money managers the same salary as a regional bank vice president. You've seen the endowments move independent so they're not part of the university system. Some corporations have turned their pension management into a revenue source by making them independent companies. I don?t know if public pension plans will ever go there.

I have to laugh at that. Why should they? More work for less pay. CalSTRS? Board and I had a lot of discussions, because they want to retain a CIO for a period of time and that?s always a threat. But there aren?t that many big corporate pension funds, and a mid-sized corporation isn?t going to pay that kind of money.

You may at some point see some corporate CIOs come to public funds as mergers continue on. That's the one big risk; if the company merges, you've got two pension staffs, and only one is going to survive.

Private equity is a very tough area because if you drop down into the second quartile in buyout funds, you're better off being in the U.S. equity market. So you really have to stay with that top tier, and you only get there by name recognition, being a solid, large limited partner which CalSTRS can be, and already is. They have a very good reputation, just like Washington does. But you have to fight to maintain that reputation.

You boil them down to risk/return as a way to make the decision?

Have you done much activism at Washington State?

Have you been involved in shareholder activism in any of your previous positions?

It's a matter of control. One of the powerful things of private equity is that you have direct control, and that's an easier way to afford change. It's tough to change the world when you are a small owner of a large group.