CIO Casey Wolf on TCDRS’ Long-Term Strategy, Steady Portfolio Growth

In this Q&A, TCDRS Chief Investment Officer Casey Wolf explains why TCDRS’ investments have stood the test of time.

By Laura Mellett

 

We recently sat down with TCDRS Chief Investment Officer Casey Wolf for an interview.

During our time, Casey explained TCDRS’ long-term investment strategy, the construction and maintenance of TCDRS’ diversified investment portfolio and reasons behind TCDRS’ continued portfolio growth and success:

Casey Wolf, TCDRS Chief Investment Officer

 

Q: Tell us how you became the Chief Investment Officer at TCDRS.

A: I was recruited by the prior CIO, Paul Williams, in 2011 to manage hedge funds as he was increasing the level of diversification within the portfolio. Eventually, I was promoted to Managing Director of Hedge Funds & Opportunistic Credit, and after Paul announced his retirement in December of 2017, I was appointed by the TCDRS Board of Trustees to be his successor. He officially retired in April 2018. And so, it has now been just north of five years that I’ve been CIO.

Q: Before joining TCDRS, you were on the investment team at the Oregon Health and Science University Foundation. Can you share more about your educational background and how that fits into your current role?

A: I have both a Law Degree and an MBA, and the mix of those I find to be tremendously useful. Most pieces of paper that come across my desk have a legal issue embedded within them, so the importance of trying to spot and mitigate it has always helped. On the MBA side, obviously, that's the numbers side, the investments side, and that's tremendously helpful.

In college, I interned on the U.S. Senate Finance Committee, where I got a lot of experience in macroeconomics and was able to witness how government impacted the overall U.S. economy. Being CIO is all about making decisions around allocating across different asset classes. And so, I find macroeconomics to be valuable because you’re trying to pick up on long-term trends and invest around them. This isn’t trading. We invest over a long period of time, so there will be macroeconomic forces you don’t want to be on the wrong side of.

Q: What attracted you to TCDRS? What made it different compared to other plans?

A: When Paul recruited me, it was impressive that he was the second CIO in the history of the plan. And so, here I sit as the third. I’ve been CIO for five years at this point, not an insignificant amount of time, but within the history book of TCDRS, I’m still brand new. I really think it’s that longevity at the top that has given us the ability to think and act very long-term. We’re not going to be shaken by a year or a quarter, and we’re always trying to look for asset classes that will perform well over a 5–10-year time period.

To add to that, I get to be partnered up with Amy Bishop, our executive director, who is the latest — and in my opinion, the greatest — in what has been a history of very long-tenured executive directors. The entire DNA of TCDRS is set for long-term planning and long-term growth, and that’s a good place to be.

Q: I’m guessing as CIO, one of the questions you get asked all the time is how you build an investment strategy. Can you tell me a little bit about that?

A: You start by recognizing the need for diversification because one of the main things it mitigates against is unforeseen risk. Things go up and down at different times. This is one of the big reasons for diversification because it softens the swings in any single market. Everybody likes upside volatility, but nobody likes the downside. So, you look for opportunities that don’t go up and down by the same magnitude or don’t go up and down at the same time, and you begin to get a framework for the entire portfolio.

That’s the first step. The second step is finding an asset within that framework that you think will outperform. So, say you want a low-volatility asset. You’re still going to try and put the most money around a low-volatility asset that’s going to get you the highest return. That’s why we have an investment policy that says we invest at the highest risk-adjusted return. It’s not the lowest risk or highest return that we’re trying to solve for; it’s both.

Q: Once you have that framework, what does that look like in practice for TCDRS?

A: My job is to allocate the plan overall and keep everybody educated and informed about why I’m distributing assets in a certain way. Once you have the framework, you pick individual asset classes that you think will outperform the others within that risk band. TCDRS is fortunate that we don’t need a lot of liquidity because it’s a relatively young plan. Therefore, I like investments that will produce outsized returns within their risk bands over a reasonable length of time of 5-10 years.

This gets us back to solving for the highest risk-adjusted return and why something like Direct Lending makes a lot of sense. Direct Lending over a reasonable time will get an 8-12% return, but the key is even on a “bad” year, it still most likely gets you close to 4%. That’s pretty impressive for a “bad” year.

When I took over, Direct Lending was close to 4% of plan assets, and now, it's over 14% with a target of 16%. Similarly, Private Equity was around 12% when I took over, and today, we sit right around 27%. It really is a team effort and, if we’re successful at finding investments we expect will outperform, then we will continue to beat our benchmarks and be one of the most stable, highest-returning plans in the country.

Q: You mentioned benchmarks. How are they used as an investment tool at TCDRS?

A: By definition, it’s trying to take a number and determine if it’s good or bad. For example, I could say, “We were up 2%,” and you might think, “That’s a dreadful investment.” But if I told you the benchmark was down 25%, you would say, “That’s a heroic performance.”

Or on the flip side, I could say, “Our venture capital portfolio was up 20%,” and you’d be impressed. But if you knew that the benchmark was up 50%, you would say, “You’re really underperforming.”

Everything is benchmarked: The plan as a whole, the different sub-asset classes (for example: U.S. Public Equity) and then by manager. This allows you to have a point of reference to determine if there’s actual outperformance or underperformance.

Q: Speaking of outperformance, you’ve overseen not only a time of tremendous growth but also a lot of volatility. Can you share a little more about your time here, what you’ve learned and what you’re proud of?

A: There have been quite a few “outliers” over the last five years. My first year ended with the worst December for U.S. public stocks since 1931. 2020 was the global pandemic. Now, we’ve got this global inflation situation we’re trying to navigate. So, it has not been a perfectly smooth set of economic backdrops, but the plan has done relatively well despite some significant curve balls being thrown at it.

As for lessons learned, you have to be willing to take some level of risk in order to produce a solid risk-adjusted return. So, if you’re super risk averse, then you’ll never achieve the desired long-term outcome because you’ll never take enough risk to achieve the desired return. I really like how the plan is currently set up, how it’s performing, and how it’s behaving in both good times and bad.

The other thing is trust in staff. The nice thing about TCDRS is that many of the staff were here long before we had these crises thrown at us. And again, it’s nice to be partnered up with Amy Bishop, who is never shaken in times of crisis. There will always be another crisis, but I’m not overly worried about it because we’ve been through so many, and I know we have the staff and the experts supporting us to get through it.

Q: Managing all of this is such a huge responsibility. How do you stay on top of your game?

A: I really try and give myself time to think about the portfolio, the different risks and whether I am missing something. I’m always asking myself that question, “Am I missing something?” because markets and economies in general are in a constant state of change, so things are never static. Making sure you have time set aside to think about how the portfolio would react in different situations allows me to really focus in times of market turmoil. I truly feel like I add the most value in times of crisis.

I like the way our portfolio is set up so that we have not been nearly as impacted by some of the recent crises as many of our peers. The true secret is to stick to “fundamental” investing. It can’t be this pie-in-the-sky; if everything works out perfectly, then I’ll make a return. It’s more like, “How can I make a good return in almost any environment?” And then, if the market really improves, I’ll make an exceptional return. And that’s exactly what we’re trying to achieve.

Investments & Finance