Allocators Are Paying Managers Too Much Money. Julio Delgado Wants to Change That.
The Red Cross chief investment strategist is focused on risk management, using derivative overlays and scenario analysis as his guide.
American Red Cross chief investment strategist Julio Delgado wants to shake up how asset allocators — and managers — do business.
“A lot of pension plans and endowments are being charged too much money, which is staying in the hands of the intermediaries, [better known as] the ‘middle guys,’” Delgado said in a recent interview.
So he’s been building a portfolio management style all his own. Delgado prefers to avoid using investment managers when he can so he doesn’t get bogged down in the selection process. Instead he focuses the staff primarily on risk management and introducing derivatives into the portfolio. “It’s not know-who,” Delgado said. “It’s know-how.”
As one of his fellow allocators explained, the Red Cross “does a lot of risk derivative overlays. Much more than almost anyone else.”
Delgado’s roots are in asset management. He ran an emerging markets bond fund at T. Rowe Price for nearly six years, giving him the confidence to run investments himself and having the Red Cross pocket the savings.
“I used to work on the buy side,” he said. “I never understood why a lot of these massive endowments and pension plans didn’t do more things themselves. I’ve been thinking [about this whole process] for years.”
Delgado joined the Red Cross’s investment team in 2005, and he’s seen the organization through several big changes. In 2017, two and a half years after hiring Greg Williamson as its CIO, the Red Cross decided to outsource its investment process, hiring Cambridge Associates to head up the effort.
In 2020, the board reversed course, moving back to in-house management, with Delgado at the helm of a four-person team. But the fund didn’t insource everything.
“We decided to outsource truly everything except investing,” Delgado said. “We outsourced manager due diligence, reporting, execution, and product/strategy development. Our focus is on asset allocation and fully understanding the risks that we own.”
Today, the Red Cross has three portfolios: a $1.5 billion pension, a $1.2 billion endowment, and some additional capital that hovers between $200 and $300 million. The strategy relies heavily on managing risk using a process that considers how investments perform in both growth and inflation scenarios.
The focus on inflation has been rewarding for the portfolio: “When things started getting bad, we made money,” Delgado said. “We weren’t focused on reducing losses, but on generating gains.”
Delgado defines each asset class as either “core” or “completion.” The “core functionality” includes alternative investment managers and is relatively illiquid. The completion portfolio is then used to manage the Red Cross’s overall risk with cash and derivatives.
To evaluate investments, the Red Cross team uses a three-by-three grid that includes scenarios of low, medium, and high inflation, and low, medium, and high growth. By comparing those environments, they’re able to evaluate the possible risks in each situation — and find ways to manage them.
Delgado’s team uses what they describe as “extremely cheap” derivatives in the completion portfolio to adjust both upside and downside risk. Rather than hiring managers to handle those derivatives, Delgado manages them in-house. His team also takes big positions, ensuring that the bid/ask spread of the options is cheap.
Delgado summed up his strategy like this: It’s liquid, transparent, cheap, and efficient.
“You need to be liquid to change things,” he said. “You need to be transparent because you need to know what risks you have. It also has to be cheap. The cheapest thing you can buy will allow you to keep most of the returns. The [final] thing you need is capital efficiency. Capital efficiency means that a portion of your portfolio can be used as leverage to reduce risk. You need cash to be able to do that.”