In practice, the discipline of long-term investing creates a wide range of distinctive characteristics for the Washington State Investment Board (WSIB), among them a nearly fifty percent allocation to private assets, a sober understanding of volatility across our risk-management practice, and the encouragement of tailored strategies in each of the organization’s asset class units. Behind the scenes, the strong relationship between WSIB’s trustee board and staff makes these practices possible. This board mandates a long-term focus, and staff encourage this focus through the way that we frame information and construct choices for the board.

Long term focus stems from 15-year time horizon and independence from political process

Our long-term focus dates to our founding in 1981. The legislature enabled our trustee directors to have this focus by giving them a high degree of independence from the partisan political and policymaking process and by allowing them to take risk without having to remain within a tracking-error threshold.

But our long-term focus also has grown since then. Even the best informed and aligned board members and staff are subject to behavioral biases, and the tech bubble showed us how some short-term loss aversion could cost us meaningful returns. The board learned from this experience by setting a time horizon of 15 years for its capital market assumptions, putting on record its belief in reversion to the mean, and committing to staying the course in a crisis. This disciplined perspective has proved extremely valuable, repeatedly.

Monthly performance reporting replaced by 20-year and since-inception reporting

One implication of this post-tech bubble set of decisions is that the board agreed to discard monthly performance reporting, added 20-year and since-inception reporting, and introduced a comprehensive risk framework that shifted emphasis from volatility generically and toward a custom view of risk relative to our purpose. Constructing investment choices in these terms has influenced our behavior to be longer-term in many ways.

Investment dialogue shifts to asset allocation vs. short-term performance

At the board level, directors’ questions now tend to be about asset allocation and managing over that fifteen-year steering period, not about shorter-term performance. In other words, questions are more focused. This is not because staff have taken any prerogatives away – quarterly data are still part of the materials – but because our materials and discussions tend to frame our minds toward the long term and because our dialogues prime this focus consistently for us.

Long-term mindset yields culture change and fuels innovation laboratory

At a staff level, the mandate to manage risk relative to our purpose required us to invest in our Risk Management and Asset Allocation team. The team grew, its standards rose, portfolio managers accepted risk input more willingly because of this competency, and recruits were increasingly attracted to risk jobs at WSIB. Technical adjustments to our risk metrics ultimately helped reinforce a culture change, and WSIB is a tighter team as a result. Today we can do something rare even for long-term investors: we have an “innovation portfolio” that works like a laboratory for pioneering long-term investment strategies, and our risk team runs this portfolio so that, if warranted, they can learn exactly how to fit new strategies into portfolio construction and asset allocation.

All these long-term investment behaviors begin with our board and the type of relationship we have with directors who serve on it. Governance matters. Long-term investors begin their work there and find that a universe of opportunity opens as a result.