CIO Corner with Ash Williams

Andy Palmer, Chief Investment Officer of Maryland State Retirement and Pension System, has a dialogue with Ash Williams, Vice Chair of J.P. Morgan Asset Management, on building leadership teams, the importance of trust, his expectations about the next 20 years and how to get the most out of fund manager relationships.

With over 420,000 members and ~$64 billion in assets under management, the Maryland State Retirement and Pension System (SRPS) administers pension, survivor and disability benefits to active and former State employees, teachers, State police, judges, law enforcement.

Ash Williams: You've spent 20 years on the private side and about that long on the public side. How do they differ?

Andy Palmer: During my first 20 years, I was at a small private organization, small enough that I was involved in bonds, stocks and real estate—helping me develop a broad view. In a larger organization, you're an expert in one asset class or industry.

I’ve found differences between public plans: Tennessee mostly used internal staff. Maryland, a similar sized plan, outsourced everything; we had over 300 manager relationships. Each model has its pros and cons. Both kinds of plans scrutinize costs. We commanded resources at the small private organization based on revenues generated and bond fees were low. At a public plan, when the state budget was tight, I figured out how to manage with scarcity.

I expected state governments’ decision-making process would be a disaster, yet I'm always heartened. Leaders share a core belief in pension assets’ importance for the beneficiaries. They’re tempted by the ‘dessert cart’—the temptation to use pension funds for non-fiduciary objectives. Yet, after weighing the merits, they have almost always chosen fiduciary prudence.

Williams: Democracy is messy. Yet with the system’s checks and balances, you get to the right place. I went through lots of battles and was consistently able to reach a constructive outcome. It speaks to the merit of democracy.

Palmer: Being successful depends on really strong leadership and vision.

Williams: At the Florida State Board of Administration, we presented resource requests in the context of return on investment. It’s a tribute to your strong leadership that you’ve envisioned that, advocated for it, gotten it adopted and sustained it in Maryland. There's no substitute for earning credibility through your performance. Take us through what you’ve done.

Palmer: You have to build the plan to generate performance and execute on it—and for a period of time, you may not perform. Tennessee had a tiny bond team and little experience. Initially we took on more risk and had a terrible 2008. But we were building something. The leadership saw that. Over time, we earned it all back and more.

Similarly in Maryland, the culture wasn't geared toward performing. We spent a lot of time investing in the organization, hiring, creating a small incentive comp I said would drive better long-term outcomes. It was hard, but after a few years, we changed the culture and the team’s performance was really good. That's created tremendous trust and credibility.

The culture thing, of being active, translates into better decision making when allocating outside, too. People responsible for making investment decisions every day are ingrained to act. It’s not a mesmerizing reality TV show you're watching.

Williams: Your career has coincided with broad regime shifts—from deflation to inflation, globalization to deglobalization, a benign geopolitical environment to tensions higher than they’ve been in decades. What do you think the next 20 years look like?

Palmer: You can't know what's going to happen. I try to build a portfolio of cash flows that will address the risks to pension plans. We have a long duration bond portfolio. Deflation doesn't look particularly likely right now, but if we had a period of sustained deflation, it would be a disaster for maintaining a strong funded ratio.

Frankly, I think inflation is a mess. We think the portfolio has a lot of inflation protection, largely through public stocks—as inflation creeps in, they can sneak in a bit of margin creep along with price increases. We have a fair amount of exposure to inflation-sensitive investments. We're trying to keep it as diversified as possible.

We’re pretty certain that over the next 20 years, reliance on fossil fuels will come down. We've expanded our investment in infrastructure assets because we think that's aligned with this energy transition—and it has a bit more inflation protection than some other assets.

We had pretty high hopes about the growth and return opportunities in China’s economy but the risk around the outcomes has grown significantly, so we pulled back in our allocation, and to the next-biggest economies in the emerging market index that have high interdependence with China.

We're also considering the plan’s risk posture. It’s been pretty low. We may discover we need a little bit more exposure to growth to meet our return objectives over time.

Williams: How do you think about partnering with your outside managers? I always look for ways to create alignment in which both parties do well together and are incented to grow the relationship to a meaningful scale. The end objective should be: It means enough to us that if it starts wavering, we commit the resources and fix it.

Palmer: I agree. We had 300 managers when I got here, 135 were public market, 170 were private. It's hard to have any strategic relationship with that many. We've narrowed that down. We can have meaningful conversations.

But the asset base on the private side went from $18 billion to $31 billion. It's hard to scale without adding new outside managers in different asset classes. In several cases, we have developed strong partnerships. With some long-time investors, we extended into different assignments. Some have been helpful sharing knowledge—even when we took money back. They showed us how to do it as we built internal management capability, even as they lost some business. They know that if it makes sense down the road, we'll come back to them.

Williams: I couldn't agree more. What you’ve described is what we did at Florida. When markets have a major dislocation, if you already have a relationship, at scale, with the most senior levels of deeply resourced global organizations, you put your heads together to capitalize on these dislocations while the spread is greatest. That trusted relationship allows you to move swiftly. The market rewards a willingness to act. Or that trusted partner could create a narrow opportunity that’s not open to others.

But while all of those things sound great, if you're doing them without a net, they involve big career risks. If you're doing them with trusted partners whose depth and breadth give you comfort, and your alignment and trust is based on experience, then you can act boldly and sleep at night.

Palmer: With the advent of the COVID pandemic, we took advantage of a number of those things, some with you guys, because we had been building that. They were really important in driving returns for us. Our governance structure allows us to get something done in a few weeks, which is not normally the case with a public fund.

Williams: Looking back at all these different things you've done, what do you want to do less of, and what do you want to do more of?

Palmer: I have long believed and embraced having people with different points of view. You have to deal with people who disagree with you a lot—that's okay.

On the other hand, I've exhibited too great a tolerance for people who are not being as productive as they should be. That's something I'm working on. This may sound self-serving, but I don't push through the things we should be doing enough. I allow other initiatives to take priority, probably because I'm trying to honor what other people want to do. There's a balance. But I need to be more effective at communicating—to spend more time developing the “why” of what I'm trying to do. I don't have time to stop and build out a deck, to get more buy in and make it happen.

Williams: Consensus-building.

Palmer: Incentives.

We're in a transition now, over the last 18 months, from having all the initiative for change driven by one person—the CEO's office—to a team-based leadership program. Success or failure riding solely on one person is not sustainable. We've been transitioning because we got big enough. We have enough management depth.

Williams: Right. One last question: If you were talking to someone new to investment management who would like to become a public pension plan CIO or trustee, what advice would you offer them?

Palmer: The Bob Maynard1 advice: “Good. Go lie down for an hour.”

Williams: It'll pass.

Palmer: Exactly. Seriously: I would applaud and encourage people, from different backgrounds, legal, operations—it's good to have a broad view. Equally so for an investor; I've been part of every investment asset class before I got here, except for hedge funds.

It's hard to overstate these roles’ implications, not only for the beneficiaries but for the health and welfare of the state. We're worth $65 billion. Our liabilities are close to $90 billion. The state budget is $60 billion. What happens to us shakes the whole state. If we underperform and it's a draw on resources, that cuts the state’s ability to hire teachers and firemen. Without strong culture and leadership, bad things that can happen. Poor results, scandals, putting the plan in jeopardy.

It takes communicating, listening and thinking strategically, which I don't think schools teach very well. I would take every opportunity to stick my hand up, to learn and demonstrate these skills. Learn how to communicate, to lead, to become part of strategic planning.

Williams: I couldn't agree more.

Andy Palmer

Andrew Palmer, CFA is the Chief Investment Officer for the Maryland State Retirement and Pension System. In this role, he is responsible for the day-to-day operations of the system’s investment division and has overall responsibility for the system’s investment program.

Previously he was the Deputy Chief Investment Officer, Director of Fixed Income for the Tennessee Consolidated Retirement System. In addition to his role as Director of Fixed Income, he led the construction of a strategic lending portfolio, was a member of the Private Equity and Real Estate Committees and shared in the responsibility for tactical asset allocation and new product development. He began his career at ASB Capital Management, a Bethesda, Maryland-based institutional advisory firm.

Mr. Palmer is a member of the Institutional Limited Partners Association, has been active in the CFA program and was President of the Washington Association of Money Managers. He received a BA and a MA in Economics from the University of Maryland.

Ashbel C. Williams

Ash Williams joined J.P. Morgan Asset Management in 2022 from his position as Executive Director and Chief Investment Officer of the Florida State Board of Administration, which manages more than USD 250 billion in assets. Previously, he was a Managing Director at Fir Tree Partners and President and CEO of Schroder Capital Management. Earlier in his career, Ash held senior roles in the executive and legislative branches of Florida state government, as well as in other public and private organizations. He received BS and MBA degrees from Florida State University and lives in Tallahassee, FL with his wife.

1 Retired CIO of the Public Employee Retirement System of Idaho.