Interview re-printed with permission from Trusted Insight.Brian Collett is the chief investment officer of Missouri Local Government Employees Retirement System (MOLAGERS), a $7.5 billion system. Under his leadership, Missouri LAGERS performed among the top in the public fund universe, returning 9.45 percent annualized net of fees for the last five years.
In this interview, he discusses the importance of transparency within the investment office; his technical background and how it helps his role; why Missouri LAGERS seeks more exposure to real assets rather than venture capital; and why aspiring CIOs should become experts across all areas.
Brian Collett was named on Trusted Insight's 2018 Top 30 Public Pension Chief Investment Officers. He graciously spoke with us on March 30th, 2018.
Trusted Insight: How does MOLAGERS' investment office innovate to remain competitive and continue providing top-tier returns?
Brian Collett: There are a couple of things that come to mind that make us different. Internally, we try to be radically transparent with each other, and that's a term I believe was coined at Bridgewater. We tell each other the truth without pause. We're not trying to hurt each other's feelings, but it is very honest. It is going to cause conflict and that's okay. The way our office is laid out, we have five offices dumping into a collaboration area with a table where we often have our discussions. You need to be radically transparent at the table. If you think it's a bad idea, you need to tell us that and why. That enables us to make better decisions. At first, new people coming into the group are a little afraid of it. Being radically open with each other on your views can leave you feeling exposed. When you learn that nobody is going to try to hurt you, it really allows our team to become better and faster.
Additionally, we're transparent with our managers. We let them know what we think. From a manager’s standpoint or partners standpoint, if you are given an investment idea from a cold lead the best answer for them is yes, a quick yes. The second-best answer is a quick no. It will allow them to go to somebody else who may be interested. They know if they call us they're going to get a quick yes or a quick no. If we think it's a bad idea they're going to know it's a bad idea before they hang up. But, if you are more guarded about your opinion, they might hang up the phone and say, “Well, are they interested or not interested?” I never want to leave a manager questioning that way. (Read more about our mission, vision and values here)
"My background in mathematics and computer science taught me about the investment process. It taught me that when you try to prove something or write code, you need to have a plan."
We try our best to do that with their performance, with any ideas or concerns. Our goal is to be transparent with them on where we stand. They know if we are happy with them or not with every conversation we have. That way there's no doubt. And I think that's really important. I think it gets us more opportunities because the more we can give them a quick yes or a quick no, the more opportunities they'll bring to us.
There's a sign that hangs on the wall in our open collaboration area which says, “Let's make better mistakes tomorrow.” Implicit in that statement is that we're trying new things. We're not always going to be perfect at those new things. We know we're going to make mistakes, but we're going to learn from them. That is really important here.
sign in the LAGERS Investment Department
One of Ryan Donahue’s principles survives here. The principle is to get 80 percent of information, make a decision, and move on. Implicit in that you're not going to know everything before you make your decision. You’re only going to know 80 percent, so you'll probably get a little of it wrong, but that's okay.
TI: Are you using any new technologies to improve your investment performance and how are you applying those technologies?
BC: Artificial intelligence is definitely going to have an impact on the investment world, it already has. Virtually, all investors are using some sort of artificial intelligence techniques in selecting stocks. Some of them completely 100 percent, some 80 and some 50. I think that's how artificial intelligence is being implemented.
"In the last quarter, we signed 22 different investments. We made those decisions very quickly with a small staff, which is very powerful. It gives us opportunities to see things that our brethren aren't seeing."
The car industry is a great example. My car has the partial artificial intelligence to help me stay in my lane and not follow too closely. That will grow gradually over time and I think that's what's been going on in the investment industry as well. The term “quant investor” got thrown out 20 years ago. And at the time they were viewed as totally different than us. I think now everybody has some level of quant or artificial intelligence process in their investment process. Some more than others, but I think it's everywhere. As asset allocators, it's in our process.
In relation to AI, I think its use will increase over time. We'll get more data on managers and the insights will become more accurate. I don't want to say cars will ever drive themselves completely, but if they do somebody wrote in the code for the decision-making processes. The decision making is still in there and been has been codified, but it is still being implemented by a human being who wrote the code. It's just the execution that is being done by machines. I think the same thing is happening in the investment world. It started before the car industry and it will be interesting to see what applications emerge.
Trusted Insight: How does your background in mathematics and experience as a technology analyst influence your approach to the markets?
Brian Collett: My background in mathematics and computer science taught me about the investment process. It taught me that when you try to prove something or write code, you need to have a plan. That plan can be via flowcharts, workflows, or something similar. It is a process you work through ahead of time. And everything we do here is just that. We have a process for hiring managers, we have a process for making decisions on investments and those processes are not all computer driven. There are many things in that process, including quantitative data-oriented aspects, qualitative aspects, decision making components and oriented people processes.
TI: MOLAGERS’ beat its policy benchmark and outperformed many peers in the last five years. What aspects of your investment strategy has allowed you to achieve this and how do you plan to sustain that performance over time?
BC: I really think it's because we're process driven. I think that process-driven decision-making is a huge part of it. The second part of it is that the Board has delegated the decision-making process to us. They set the asset allocation and we implement the asset allocation. If a manager comes to us with an investment idea, we can decide at the staff level to make that investment. The decision-making process is pushed down to the ones that can do it quickly. Again, the quicker you are able to answer yes or no the more opportunities you can see. And so, that is how we're able to stay a step ahead and keep investment opportunities coming across our desk.
In the last quarter, we signed 22 different investments. We made those decisions very quickly with a small staff, which is very powerful. It gives us opportunities to see things that our brethren aren't seeing. If the entire team is here in the office, we make a decision right then and there within a very short period of time. And if we're not all in the office, we have to make a phone call and talk to somebody on the road and make that decision together. That is very powerful, and our Board is very comfortable with that, because they've approved the decision-making process not each decision.
One last thing, from an asset allocation standpoint, we have an asset allocation and a liquidity allocation. A liquidity allocation defines how much we are able to have in what we define as short-term liquidity, medium-term liquidity, and long-term liquidity. We define short-term liquidity as investments where we can liquidate within a week, and then the medium is within a year, and long-term takes longer than a year. The Board sets a minimum and maximum for each one of those buckets. Those allocations are handed to staff to implement. We will continue to implement these and improve going forward. I think of recent things we've been trying to do and we're focusing a lot on real assets. We've seen interest rates fall for the last 30 or 40 years. I'm not trying to say I think rates going to go up, but I'm pretty comfortable saying they aren't going to continue to fall. Investments that do well during rising and/or neutral interest rates are the things we're looking for. This is why we are trying to get more exposure real asset portfolio.
TI: What assets specifically in the real assets bucket interest you the most right now?
BC: Some of the things we've invested in recently is shipping. Ships, large tankers and cargo. We've done that on the buy lease-back, where the manager we hired buys the ships and leases them back to large ship users. We get exposure to those ships, we own them. That value goes up and we get the gain on that. Another thing we've been interested in is the minerals and mining industry, that's a recent investment for us, also. That's commodities exposure.
Another recent investment for us is in aviation. They're buying planes, if they're on a lease, they'll get the lease money for the next two or three years, but the ultimate aim is going to park them out. They buy planes, park them out and sell them back to the airline industry. Those assets get broken up and sold individually. I jokingly say it's an airplane junkyard. They usually have the big parts pre-sold. They'll buy them and have the engine pre-sold and so forth. Then the residual parts will be sold over time. It's a great industry, there is a lot of regulation in it.
We want exposure to anything that is in the real big assets bucket. If I asked you, “what assets go for millions of dollars,” there's not that many, right? There's building, ships and airplanes. There's not a lot of other things. Pipelines and shipyards are like real estate but not quite real estate. That is a hard bucket to sell, real assets. We are spending a lot of time thinking about that, trying to get the right exposure.
TI: MOLAGERS' portfolio has no exposure to venture capital. What factors contributed to this decision?
BC: That is probably the one place we do not have exposure to. The analysis that we've done is venture tends to be highly correlated to the public markets. Most of the venture investments exits are to the public markets so we're trying to find things that are diversifying away from the public markets, because we have a lot of exposure there already. You definitely get higher returns in venture capital I would never argue against that, but it tends to be that way when the equity markets are up. We're trying to find things that move in different ways from the equity markets, not just magnified to the equity market.
TI: What advice would you give to an aspiring chief investment officer that you wish you were given early in your career?
BC: The number one lesson is to be your Board's investment expert. When I talk to a new CIO, I always tell them that. For instance, if PIMCO is going to talk about fixed income, it's a dual presentation. If Bridgewater's going to be there talking about hedge funds, it's a dual presentation. It's a dual presentation because it's you and them. If you sit down, then Bridgewater becomes the expert.
The challenge is that you need to become an expert in a lot of areas. The moment you're not, it's a problem. That is not just sound advice for a new CIO. It will help anyone in any industry or career. And I see people say, "Hey, I'm not really good at this, I'm going to get this person to talk to the board about it.” No. You need to be there with them and constantly pushing yourself to learn. It is easy to let someone else be the expert, but that is not the way to go. You have been hired to be the expert, become the expert!