The city of San Jose’s retirement system posted its highest returns in decades thanks to a timely rebalancing amid the coronavirus pandemic.
The pension fund, which is split in two, brought in 29.46% for its pension system for employees of federated cities and 26.49% for its police and firefighter pension plan, according to its investment manager, Prabhu Palani.
Palani joined the city’s pension funds as CIO in 2018, having spent the first part of his career in portfolio management. Since then, the plan has gone from the 99th percentile of performance relative to its peers to the top quartile, Palani said.
In 2020, the fund had about a quarter of its assets allocated to fixed income securities.
“I thought assets at all levels were expensive,” Palani said. Institutional investor. “I thought maybe there was a recession coming.”
Although he said he could not have predicted a pandemic, it turned out that the decision was fortuitous. In March 2020, the markets collapsed. “We had the fastest bear market in history,” Palani said. “This one lasted all 12 trading days.”
As the market fell about 35%, Palani’s team decided it was time to redeploy capital into growth assets.
“We weren’t sure if we were going to time the bottom perfectly,” said Palani. “Personally, I thought they would go down even more.”
The San Jose investment team classifies assets into three categories. Growth, to which the fund moved in March 2020, includes public and private equities, other private asset classes, high yield credit and emerging market bonds.
The other two categories are a low beta compartment, which contains short-term fixed income and absolute return strategies, and an inflation protection category, which contains TIPS and commodities.
Earlier in 2021, San Jose revisited these allocation strategies. Amid broader market concerns about rising inflation, funds made the decision to allocate a small portion to commodities.
“It hasn’t manifested itself in asset prices yet,” Palani said of rising inflation. “You’ve certainly seen other prices go up. If you look at the bond markets, they always indicate it’s transient. The problem is unanticipated inflation, and it is something we are hedging against.
Palani attributes his team to one of the sources of the fund’s outperformance. Since joining us in 2018, Palani has expanded the investment team, bringing in members with experience in portfolio management.
“When we talk to a manager, we know exactly what they’re thinking, and you can’t put a price on that,” Palani said. “We are very sympathetic to the managers, but we are also very skeptical. ”
The board also played a role, Palani said. San Jose requires that some of its board members have experience in the investment industry. Palani said the team was lucky in that regard: three board members are venture capitalists, which is a boon for Palani’s burgeoning venture capital program.
The investment team also has more freedom compared to some of its peers. The pension system is independent from the city, and the team itself has an investment delegation.
Going forward, Palani has a keen eye on inflation and the Delta variant of Covid-19, and, perhaps most importantly, is looking for yield. “I get paid to worry,” he joked, adding that there are few asset classes that can overcome the return hurdles necessary for a public pension fund to be successful.
“The past has been great, but have we borrowed from the future in terms of performance? Said Palani. “And how often can you get a 30% year?” ”