Matthew Leatherman, Director of Research at FCLTGlobal, speaks to Theresa Whitmarsh about her commitment to longer horizon investing, corporate governance and the importance of being challenged by your board.
Theresa Whitmarsh is Executive Director of the Washington State Investment Board, one of the United States’ leading institutional investors managing over $103 billion of state pension, insurance, and private assets.
ML: Thank you for being part of our series of interviews with executive leaders in the FCLTGlobal membership community. What does long-termism mean to WSIB?
TW: We have about 43 percent of our retirement fund assets in private markets which, by nature, are much longer-term commitments and less liquid than public market investments. And, in the public market, we are primarily a long-only investor. I think we have the opposite of a trader mentality.
We invest about 65 percent of our public equity portfolio passively – our only active allocations are in global markets – because of a strongly-held investment belief that it is very difficult for active management to outperform passive in highly efficient markets. Also, our public market investments must be highly liquid because we are so heavily weighted to private market allocations. I have been here more than 13 years, and we have invested passively in public markets for the entire time.
ML: What choices do you think have helped WSIB become more oriented on the long-term?
TW: Our board is comprised of beneficiary representatives and plan sponsor representatives, and they are a special group. They were able to get really comfortable with private market investing in the very early days, starting in 1981, even though others considered it a risky strategy. We wanted to buy real estate directly, own it for the cash flows over time, and not sell unless there was a huge opportunity.
We couldn’t invest this money internally because we can’t pay private market-level wages, but we also don’t really like partnership funds because they don’t match our horizon viewpoint. Our solution was to find great operators and create real estate operating companies so that those operators are dedicated totally to the WSIB. They own roughly two percent, and we own the remaining 98 percent. We have an eight percent assumed net rate of return for real estate, including a six percent target from cash flows and two percent from appreciation. The investment resembles a bond but with a much better return. From there, we created a new tangible asset class about six or seven years ago, including investments in agriculture and timber. Like our real estate strategy, we own those assets to earn the cash flow. WSIB uses all kinds of interesting structures and will pool with other large institutional investors who have a similar long-horizon mandate. I am proud of that strategy and how we have built it.
“WSIB uses all kinds of interesting structures and will pool with other large institutional investors who have a similar long-horizon mandate. I am proud of that strategy and how we have built it.” Theresa Whitmarsh, Executive Director of WSIB
ML: I'm struck by the emphasis that you put on economic growth of those investments as opposed to just changes in the financial value of them. This matters a lot to savers.
TW: Absolutely. The problem is the public markets are so captured by a trader mentality right now. CEOs and corporate management teams, even when they want to act in long-term ways, struggle with the implementation. I think that's why you see fewer companies going public, which is unfortunate because the public markets continue to be really important.
One of the reasons we are committed to FCLTGlobal is because it involves everyone in the value chain (savers, asset owners, asset managers, corporations). We all need to be part of solving this.
ML: What opportunities do owners in particular have to continue pushing forward this idea of longer-horizon investing?
TW: Our investment decisions are ultimately driven by returns, and we believe passive investing is going to give us a long-term better return in efficient markets like U.S. public equity. As a result, we have to figure out how passive shareholders can be effective at engaging with companies on key corporate governance issues. I think we have a long way to go. The fact that the activist industry exists shows the challenge of large institutional investors’ approach to passive investing. There wouldn't be any room for activists if we were more effective.
One practical opportunity is working with index providers. If we are going to invest passively in public markets, we must use our influence more to decide which types of companies are included in the indices. Shareholder rights need to be strong for companies that are part of passive indices.
Dual class shares are especially on my mind. I think it’s a myth of the technology sector that a company cannot survive without its superstar founder. A few huge examples contribute to the mythology. Apple failed when Steve Jobs left, and the company got back on course when he returned to his post. And yet other companies can have very strong governance and orderly leadership transitions, like Microsoft.
“Shareholder rights need to be strong for companies that are part of passive indices.” Theresa Whitmarsh, Executive Director of WSIB
ML: Our time is almost over, so let me end with this. You gave your board a great compliment earlier in terms of expressing a belief and sticking with it over decades. What can we learn from your experience with your board?
TW: One unique aspect to our board is that we have five non-voting investment experts on it, and they are selected by the 10 voting members who represent the beneficiary groups and the plan sponsor. Board members get the perspective of staff, independent consultants, and investment experts. This creates a rich dialogue.
Also, we operate very transparently with our board. I take a listening tour every year. I'm right in the middle of it now: going to the board member’s community, listening to their ideas, and building a strategy and education calendar around their needs.
Once you have earned a good brand and reputation, it becomes a privilege to serve on the WSIB, and people want to be involved. We end up with very engaged, bright, and committed people.
I encourage corporate managers not to be afraid of engaged and active boards. Have a board that truly challenges you, rather than one that is composed just of friends or like-minded cohorts. Anyone leading a large, complex organisation should be completely comfortable being challenged by a strong, well-informed board.
Lastly, I would remind asset owners that the value creation process is tough. It is difficult to find new markets and new products in a hypercompetitive world. We need to give cover to executives who truly are visionary leaders so they have the time and latitude to build a company that is sustainable for the long-term.
“We need to give cover to executives who truly are visionary leaders so they have the time and latitude to build a company that is sustainable for the long-term.” Theresa Whitmarsh, Executive Director of WSIB