One State Treasurer’s corporate call to action

Despite innumerable business school leadership classes, Harvard case studies and even full degree specializations, not to mention the media’s obsession with defining and redefining the concept of leadership, true leaders are few in number.

There are, however, individuals clearly underlining what positive societal change should look like with their actions, while executing many critical initiatives simultaneously that require focus and precision.

Connecticut State Treasurer Shawn T. Wooden

Connecticut State Treasurer Shawn T. Wooden is the only elected African-American State Treasurer in the country, the sole trustee of the $38 billion Connecticut Retirement Plans & Trust Funds, and the subject of this most recent interview article.

He was elected in 2018, and has been serving in this role since January 2019, following a successful 21-year career as an investment attorney specializing in public pension plans.

Vailakis: Treasurer Wooden, thank you for taking the time to share your insights with Alternatives Watch readers. To kick off our discussion, considering the evolving macroeconomic environment largely due to COVID-19 related lockdowns and affiliated unemployment at the federal, state and local levels, how do you see such dynamics impacting pension funds like the Connecticut Retirement and Trust Fund (CRPTF)?

Wooden: Public pension funds are positioned differently throughout the country.

Coming into office in January of 2019, I expected a market downturn and increased volatility. Although, admittedly, I didn’t expect a pandemic with the resulting speed and magnitude of the market disruption. That said, the steps we took in 2019 and early this year to de-risk the CRPTF portfolio, stabilize our Teacher Retirement Fund and optimize liquidity management, positioned us well for this macroeconomic environment. More specifically, we reduced our public equity exposure, increased fixed income and expanded our private market allocations. We also re-amortized our unfunded teacher pension liabilities, reduced the return assumption from 8% to 6.9% and hired CRPTF’s first Chief Risk Officer.

Alternative investments are diversifiers in the CRPTF portfolio and represent approximately 32% of the fund.

Vailakis: How do alternative investments fit into the investment portfolio at the State of Connecticut?

Wooden: Alternative investments are diversifiers in the CRPTF portfolio and represent approximately 32% of the fund. Included in this category are private real estate, private equity, venture capital, private credit, other real assets and hedge funds.

Vailakis: What percentage of the portfolio is currently allocated to private equity, venture capital and private/distressed credit, and how has the allocation plan shifted for that portion of the portfolio given more recent market dynamics including an anticipated default cycle?

Wooden: The current allocation to private equity, including venture capital is 10% and private/distressed credit is 5%. The allocation to private/distressed credit was added as part of the asset allocation changes made in February 2020. Given the recent dislocation in the markets, the initial allocations have focused on the distressed and special situations portion of the market. We believe that active management in the private credit and public high yield and bank loan space will help to navigate the anticipated default cycle.

Vailakis: How do you envision the Connecticut Inclusion Investment Initiative (Ci3) will provide opportunities for minority or women-owned Connecticut-based and emerging investment management firms, progressing to meet the investment return needs of the overall portfolio?

Wooden: Many public pension emerging manager programs have fallen short of providing access to capital in a consistent and meaningful way.

The Ci3 program is designed to increase opportunities for emerging diverse managers and to maximize risk adjusted returns for our portfolio. The program will increase allocations to diverse managers across all asset classes, provide a pathway for growth within the program and host an annual conference to identify the best emerging diverse talent in the industry. More specifically, the target percentage of allocated capital to diverse managers will double and a range of investment strategies will be broadened in order for the CRPTF to take advantage of greater opportunities to improve risk adjusted returns with emerging and diverse managers. Importantly, we are also creating a tier of participation for a manager to grow larger and remain with the program.

Vailakis: In what ways might public pension investment executives approach allocations to emerging and minority or women-owned firms to help shift the playing field toward a more diverse Wall Street and overall investment culture?

Wooden: Empirical data supports the fact that diversity improves performance.

So, diversity and inclusion are important considerations when my office makes decisions on allocating capital. In fact, we are one of the few public pension plans in the country that analyze the diversity and inclusion metrics as part of our due diligence process when reviewing investment managers.

The reality is that allocation decisions speak much louder than words. So, consistent with our fiduciary duties, I believe that more public pension funds should fully appreciate the value proposition in doing business with emerging, minority and women-owned firms. Moreover, public pension plans should insist that majority-owned firms also have diverse teams. If this occurs, then capital allocation decisions will help change the culture of the financial services industry to adopt and implement diversity as a business necessity.

Vailakis: Do you have any advice for public pension plans that are considering developing diversity-focused investment programs like the one you run?

Wooden: For our Ci3 program, we utilize fund-of-funds managers that are focused on identifying diverse talent at an early stage. We also look for diverse managers when investing for our broader portfolio. 

In other words, I would recommend that public pension plans be intentional and programmatically focused on allocating to emerging diverse managers and, simultaneously, integrate a diversity mindset throughout the manager selection process for the entire portfolio. I’d also recommend that public pension plans considering developing diversity focused investment programs participate in the many emerging manager conferences for alternatives and sit on the diversity and inclusion committees whenever possible.

We’ve been engaged with the Institutional Limited Partnership Association (ILPA) which is tasked with finding ways to improve diversity in this area.

Vailakis: Treasurer Wooden, please speak to the newly launched partnership between your office and the Ford Foundation to convene a coalition of CEOs representing multi-billion dollar industries, to advance racial and economic security and opportunity both within and outside of their companies. Members of your office have deemed this your “Corporate Call to Action.”

You’ve assembled quite an A-list of executives for this initiative; what do you plan to accomplish by this time in 2030 and how will engagement impact the individual firms involved?

Wooden: We have convened a coalition to confront long standing racial and economic disparities. To date, our participants represent more than 400,000 employees, $484 billion market capitalization and $22 trillion in AUM. We will establish long-term, measurable commitments that address the need for deep, structural changes in order to advance social change, racial justice and greater economic prosperity for all.

Collectively, we believe that we can exponentially increase our impact in sustainable ways. I often speak about this through the prism of the “mirror” and the “window,” looking inward on how to do things differently, within their own organizations, as well as how they can deploy the intellectual and financial resources towards addressing racial economic disparities in society.

In a study by McKinsey that says if we were to close racial economic disparities by 2028, we could increase gross domestic product in this country by four to six percentage points. This is compelling evidence that not only shows that this is the morally right thing to do, but for anyone who has an interest in growing our country’s economy, addressing racial inequities is simply the smart thing to do.

If a diverse manager is strong in a particular strategy and they have built their organization to focus on that philosophy, they should continue to do that.

Vailakis: What advice do you have for emerging minority and women-owned fund managers?

Wooden: Don’t give up and continue to focus on your core competencies.

Often times, diverse managers will look to change strategies based on what they think the institutional investors are looking for in the current environment. If a diverse manager is strong in a particular strategy and they have built their organization to focus on that philosophy, they should continue to do that. The market is cyclical and when the strategy is back in demand, they will be the best choice. A good track record is difficult to build and maintain — that should be the focus.

Vailakis: Thank you so much Treasurer Wooden for taking the time to share your views with the broader alternative investment community. With many high-level initiatives on your plate, you’re obviously quite a busy person. It was a pleasure to connect and to learn more about what you’re up to at this time of change.

Wooden: Thank you, Nancy.

Nancy Vailakis

Nancy Vailakis is a 16 year veteran of the alternative asset management industry, having held prior investor relations roles at Cerberus Capital Management and BlueMountain Capital Management. Vailakis holds an MBA in Finance from the NYU Stern School of Business.

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