06/14/2021 | by
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The decision to adopt a completion portfolio of REITs, offering access to the industry's newer property types, has been instrumental in positioning the City of Austin Employee's Retirement System (COAERS) for optimal growth, David Veal, chief investment officer, says.

Indeed, for Veal, the events of 2020 confirmed the wisdom of having a flexible portfolio that reflects changing consumer trends. "Positioning your portfolio for the future is always a challenging task, but in my experience, tailoring it to your needs has never been easier than it is today," Veal says.

A former naval officer, Veal says he has always been fascinated with the complexity and interconnectedness of financial markets. Given their constant change, "there is always something new for me to learn," he says.

Five years ago, a friend forwarded Veal a posting for the CIO opening at COAERS with a note saying he thought he would be a great fit. The system's first CIO had made significant progress toward making the fund a top performer, and Veal saw this as a great opportunity to build upon that solid foundation.

"The more research I did the more I became convinced that this was a big opportunity to make a significant difference for an important organization, and over time it has proven to be exactly that," he says.

Veal recently spoke with REIT magazine on topics including COAERS' strategy and the changing role of real estate in the portfolio.

What is the current investment strategy for COAERS?

An adage that I learned in the military says that great strategy begins with a deep appreciation of your own constraints. At COAERS, we have applied that principle and determined that our small size could be a significant disadvantage in trying to build out a strong program in private equity and hedge funds like our larger peers in the area have done. Secure in that knowledge, we instead chose to focus intently on asset allocation, which everyone agrees accounts for 90% of longterm performance but where few have devoted that level of resources. That approach, which we call "the Austin model," has produced top quartile performance in recent years and the key going forward is to sustain that focus.

What are the COAERS investment goals?

The goals the Board of Trustees has set for the investment program boil down to adding value above a passive implementation, making the most of the opportunity set, and earning enough to sustain the System over time. Each of these themes is important for a different reason, and as such we tend to look at them as a mosaic when evaluating our effectiveness. The board has also made diversification a central theme of the program, which is becoming an ever more important consideration in a world where traditional 60% stocks/40% bonds portfolio construction may be at greater risk.

How has the role of real estate in the COAERS portfolio evolved?

Real estate was first added to the COAERS pension fund in 2004, in an effort to offer a combination of capital appreciation for long term growth and income to pay benefits. Today, the fund has a 10% target to the asset class, which makes it a very important part of the program. About a decade ago, COAERS examined its real estate holdings and realized that while it had good exposure to retail, office, residential and industrial, it was lacking some of the newer property types available. My colleague, David Stafford, did some great work on this topic and helped us realize that over the last 15 years, the fund could have done about 180 basis points per year better with a portfolio of REITs that would have been better diversified and more liquid than what we held. Much of that performance improvement would have come from exposure to newer property types such as data centers. The private core U.S. fund was cut by 50% and money was redeployed to a completion portfolio of REITs, which is currently allocated to the FTSE Nareit All Equity REITs Index as its baseline. COAERS excluded the property types it already owned in private funds, such as shopping centers, office, industrial, apartments, and infrastructure, and added residential property types like manufactured housing and retail properties, such as free-standing retailers. That strategy allowed us to capture those newer property types, increase the liquidity of the portfolio, and reduce our overall fees in the real estate portfolio dramatically.

How do you implement the investment policies and decisions of the board?

Something important that we did early on in my tenure at COAERS was to go through the process of articulating a set of investment beliefs. These are the foundational principles that detail the why and how of what we do, which includes everything from how we think about passive versus active investments, public versus private, and so on. Once those foundational principles are agreed upon, we have found that the implementation decisions are relatively straightforward. Over time, we have come back to these principles over and over as a touchstone for making important decisions.

From your experience, what's the key to being an effective CIO?

Once upon a time I imagined that CIOs spent their days focused purely on markets and investing, but time and experience have helped me see that the role is much richer and more multi-faceted than that. Being an effective CIO includes working with the board to develop strategy, delivering on goals, and achieving good governance. It is also about developing a great team and ensuring they are running in the right direction to implement strategic priorities, together with managing external relationships to ensure that our partners are clear on our expectations and intent on achieving mutual benefit.

What are you most proud of in your career?

My career has offered me many opportunities to invest in the next generation through effective management and intentional mentorship, and I have done my best to make the most of those. In my own life, I have had many amazing mentors, such as Britt Harris (currently president, CEO, and CIO at The University of Texas/Texas A&M Investment Management Company, or UTIMCO), who have helped me grow both professionally and personally by sharing their experience and wisdom. Having the opportunity to help develop those around me and play a role in helping them use their gifts to the fullest is a tremendous privilege that I take seriously.

What is the most important lesson you've learned along the way?

I have always been struck by how much the business of investing is ultimately about people and relationships. Personalities matter a great deal and it's important to consider what motivates individuals as well as how those traits complement each other within a team. Organizations also have personalities in the form of culture, which is an area that we consider carefully at COAERS. Our best relationships exist where firms exhibit a deep desire to deliver strong outcomes for clients like us instead of merely gathering assets.

Do you have a favorite investment book?

One of my favorites is Winning the Loser's Game by Charlie Munger. I love the clarity it brings around the idea that the best investment strategy for an organization is the one that it can stick with over the long term. Munger also counsels that successful investing is more about avoiding the mistakes of others than always swinging for the fences.

What are your goals for COAERS in the years ahead?

During my first five years in this role, my goal has been to see that the investment program at COAERS achieved its full potential of becoming a best-in-class program. With that accomplished, I am now keen to make sure that the fund can sustain top performance over time. That means continuing to focus on strong execution day-to-day as well as thinking about additional areas where COAERS may develop a competitive advantage, such as emerging asset classes that could offer outsized returns.

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