With over 480,000 members and $138 billion in assets under management, the New York State Teachers' Retirement System (NYSTRS) sits among the 10 largest, and best-funded, public retirement funds in the United States.¹

Ash Williams, Vice Chair of J.P. Morgan Asset Management and the former CIO of the Florida State Board of Administration (FSBA), recently sat down with NYSTRS CIO Tom Lee for a candid conversation on a wide range of topics, including the importance of active fixed income, emerging market opportunities, the private credit landscape, equity valuations and the power of partnership and investment discipline.  

Ash: Is your funding level a source of strength that allows you to be a disciplined buyer during dislocations, or a limiter of liquidity that could lead to forced selling under extreme conditions?

Tom: When there’s a downdraft in the market, all of a sudden, you’re above target in illiquid assets and you have very few levers to rebalance. Primarily, it’s public equities—unless you have a cash balance.

We've been taking a hard look at the levers we do have. We recently used the secondary market to rebalance our private equity portfolio. Though we were able to get a pretty good NAV out of it, I wish there was a more efficient way to rebalance without having to go through these year-long secondary sales processes.

Ash: Over the last decade, when rates were lackluster, fixed income allocations dropped by 30-50% at most funds. In the period we're in now, where, as our Global Fixed Income, Currencies, and Commodities CIO Bob Michele says, “Bonds are back”, you can make a pretty significant chunk of your actual return assumption within your bond allocation. In many plans, safe, high-quality, liquid, fixed income allocations are in the high teens or low twenties.

How are you thinking about liquid fixed income in your portfolio, given the change in the rate environment? Have higher rates affected how you achieve diversification in portfolio construction?

Tom:  Our fixed income allocation is 28% of our total portfolio and has always been pretty stable. We have always treated domestic fixed income, approximately 14% of NYSTRS’ portfolio, as our anchor to windward. All of it is high-grade corporates and treasuries. In those painful periods where you were getting paid nothing to hold fixed income, we stuck to our allocations because we understood the role of fixed income. When you have an $8 billion retiree payroll, you want to make sure you always have ample liquidity to pay those benefits.

There has been a dramatic change in the risk profile required to get a 7% return. Again, you need to be able to stick to your asset allocation. My board has always understood that fixed income is not meant to be an alpha engine, but rather a stable anchor to windward. And I think that's a really, really important reason we don't swing our asset allocations.

Ash: That's a great point. For fixed income to continue to serve as the anchor to windward, it has to be curated so that you’re not taking big duration bets or huge credit bets. Some of that curation can be achieved through an active approach.

If you think about it, the distribution in fixed income returns among active managers in the past three years has been pretty significant. Some tried to juice returns by exposure to certain Asian or Eastern European assets, for example, and found it didn’t work out too well.

Over the last decade, falling rates, accommodative central policy, increasing globalization, lower prices and higher profit margins were all supportive to broad market growth across asset classes, across sectors, across companies, etc. Most of those winds are in reverse now, which to me sets the stage for active management and the opportunity to add exposure there. Do you agree?

Tom: I do agree. Today 100% of our fixed income book is actively managed. Public equity is about 52% of our allocation, a combination of passive and active. Overall, our goal is 75% passive, 25% active.

A really interesting area is emerging market debt (EMD). The demographics, the dramatic shift from agriculture to services, plus the opportunities to actively manage EMD make it a potentially interesting area for us.

Private credit is another area of interest. Everybody's jumping into it, but we've been very, very careful. We have a laser-like focus on small to mid-market companies, non-sponsored, secured deals. And I would take those all day long right now because I don’t see the financing needs going away.

Ash: We think one of the fundamentals setting up these opportunities is the constraint on what banks can do with their lending. The big banks have all just reported earnings, and they all had special charges to cover the problems of regional banks back in Q1 of 2023. Those kinds of things aren’t going to go away. But to your point, it’s important to be very, very selective because there's so much market interest in this area.

A lot of people have come into the market with credit books and private lending books. But when the tide goes out and things become a little tougher, we'll see who really knows what they're doing.

Real estate is another asset class that has been tougher of late. How do you see the opportunity set going forward?

Tom: Once the dust settles, we think there will be an opportunity for funds like us to provide mortgage capital. While we are not there yet but, as a large institutional investor and a public plan, time is on our side to see these opportunities through. We’re also fortunate to have ample liquidity.

Specifically, we see opportunity in owning grocery-anchored shopping center assets—particularly in markets where there is a demographic shift in terms of the ethnic composition of the local population.

For example, my wife is from Pasadena. The Ralphs and Giant Eagles of the world don’t target the Hispanic and Asian populations that call that area home, which has allowed specialized ethnic grocers to shine. We're exploring how we can capture those demographic shifts and cater to those types of populations. We think the potential for durable income is tremendous here.

Ash: That’s an excellent way to do well by doing good. Prudence and patience are meaningful assets for the public pension community. As is liquidity, which NYSTRS is fortunate to have. How do these factors impact your asset allocation decisions?

Tom: We’re 99% funded and enjoy the benefits of being a long-term strategic investor. If you look at our asset allocation, we're not heavily allocated to private equity or real estate, with allocations of 9% and 11%, respectively.

In private equity, we have a mature program and I anticipate that those cash flows will again be forthcoming in 2024. For real estate, our portfolio is half core and half opportunistic. For both asset classes durable cash income is very important to us.

Ash: What are your thoughts on equity valuations and the attractiveness of international markets ?

Tom: It all goes back to long-term asset allocation and diversification. If you look at peer returns over past periods, it boiled down to U.S. versus international. If you were overweight U.S., you exceeded the returns of peers who were less weighted in U.S.

However, I see this as an asset allocation decision, not a tactical call, and  we're going to stick to our allocation. We may revise how we approach international investing, however. For example, one of the things we’re looking at is EM debt. So, if you're going to do EM debt, what is the source of funding? It may come from international equities.

Ash: When you and I were earlier in this game, EM Asia was something of a monolith. Today, there are very distinct shapes emerging along with opportunities for active discernment of value and risk that may compensate the investor. How do you view these global opportunities?

Tom: As a U.S. fund with a U.S. raised investment staff, we have to be careful not to view the world from a solely U.S. perspective. We just hired our first class of investment fellows.  We looked for folks from diverse backgrounds, with diverse sets of experiences. We also encouraged liberal arts majors to apply not just those with finance or business majors. Today, you really need a holistic understanding of the ex-U.S. world. It's always been important, but even more so now. 

Ash: I agree. We took a similar approach when I was at Florida, and I'm proud to say that our team included people from all over the world. Pluralism is good for decision-making. There are lots of things in the markets we can’t control, but you have always had a good perspective on managing what you can. Can you elaborate on that?

Tom:  As a public pension fund, I think there are three main things we can control: asset allocation; the time we have to allow things to play out; and our ability to be opportunistic when good opportunities come our way. The rest we try to manage to the best of our ability.

Ash:  Let me suggest a fourth thing: The character and integrity of the partners you choose.

Tom: You’re right. I tell my investment staff it’s a two-way street. We want to be a trusted partner as much as we want a trusted partner.

Ash: Which brings us to alignment. To your point about a two-way street: If you can be smart, long-term, invest in scale and are perceived as a thoughtful and stable partner—especially when things are tough and values are falling through the floor—you have something rare. When trusted people are important to each other, it’s not a one-way street.

Tom: I absolutely agree. And it’s why I’m a big fan of your CIO forums. Everyone in the group is smart and no one is shy about sharing what they know. So we learn from each other. I think that helps make you a better person, a better investor and a better leader.

Tom Lee

Tom Lee has been the Executive Director and Chief Investment Officer of NYSTRS since 2007. He also serves on the Board of the National Council of Real Estate Investment Fiduciaries and the Board of the PREA Foundation. Tom holds a BA in Political Science and Sociology from Dickinson College, an MA in Political Science from Temple University, and an MBA from George Washington University.

Ashbel C. Williams

Ash 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 (FSBA), 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 the Florida State University and lives in Tallahassee, FL with his wife.

¹ New York State Teachers' Retirement System, nystrs.org, Data as of Jan 2024