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Michael Walden-Newman Grows a Diversified Pension Crop

Nebraska’s state investment officer has brought the fund management expertise he honed in Wyoming to usher in a multiasset approach to public investing.

Many in Nebraska would be surprised to learn that their state investment officer spent the early years of his career in West Africa. Managing pension and other public money for the Cornhusker State was far from Michael Walden-Newman’s mind when the Oregon-raised college grad signed up for a four-year stint in the Peace Corps, heading to Senegal in 1976 after a breakup with his college girlfriend.

Fast-forward 40 years to the present where, unlike other heads of U.S. pension investment offices, Walden-Newman’s job extends beyond management of just a defined benefit plan. Not one to waste time, the new SIO arrived in Lincoln in December 2014, just five days after vacating his role as CIO of the Wyoming State Loan and Investment Board in Wyoming’s capital, Cheyenne.

Since taking the helm as SIO at the $22 billion Nebraska Investment Council, which directs investments for the Nebraska Public Employees Retirement Systems, he’s brought an investment philosophy honed in Wyoming to his new role in Nebraska: “Don’t forget the first tenet of investing: Don’t lose the money.” He oversees Nebraska’s money across 32 investment programs — including the $10 billion state defined benefit and cash balance plans, $2.7 billion in seven retirement savings plans and a $4 billion in-house operations investment pool. NPERS, on whose board the SIO sits, is solely an administrative, noninvesting body that sets the present 8 percent actuarial rate of return for the investment office and mails retiree pension checks.

Walden-Newman’s approach to asset preservation is to target the funds’ volatility, which, with the help of consulting firm Aon Hewitt, has been set at 12.5 percent, projected to generate a 6.5 percent return. “We manage our portfolio the way we believe is best, and volatility is first for us,” he explains.

The Nebraska cash balance plan for state and local employees has an 82.7 percent funding ratio — the amount of current assets to future liabilities — whereas the school employees’ defined benefit plan is 90.6 percent funded, according to the National Association of State Retirement Administrators in Lexington, Kentucky. Unlike his counterparts at most state or local public pension funds, the SIO does not have to manage these assets to achieve the 8 percent return assumption. “We’re not pressed to adapt our asset allocation to target any percentage return,” says Walden-Newman. That decision rests with the pension administration body, which, he continues, is “not something I think a lot about.”

As he did in Wyoming, Walden-Newman keeps asset management on a five-year refresh cycle by conducting what he terms a blank sheet review. In that process, the SIO and his five investment staff march through the portfolio, asset class by asset class, and conduct a one-year study of each to determine how the class — not the managers — is doing. The investment office solicits questions from more than 20 asset managers, speaking to the research team (rather than the portfolio managers) at each shop about, for example, the current status of global equity. Walden-Newman then boxes up six to eight of the best ideas, sending them to Aon Hewitt for review.

“I can’t think of another way to manage the portfolio,” says the SIO. “People tend to nibble around the edges. It’s the difference between utilizing the current best thinking versus tweaking a portfolio set up ten years ago.” Walden-Newman is also moving toward creating a multidisciplinary team, rather than having each investment officer working in an asset class silo. “Everyone in the state wants to continue on a firm footing,” he concludes.

Walden-Newman found his way to Wyoming when state treasurer Cynthia Lummis — now Wyoming’s member-at-large in the U.S. House of Representatives — tapped him in 2004 to become the first CIO for Wyoming’s permanent funds portfolio. The $5 billion fund was invested in a bond portfolio in the Treasurer’s Office when Walden-Newman, who majored in English at the University of Oregon, arrived. He turned it into a fully diversified portfolio in his first five years, then performed the blank sheet review process in the next five. While in Wyoming, Walden-Newman was responsible for managing the state’s sovereign wealth coffers, including the Permanent Mineral Trust Fund, which had grown with mineral tax revenue from $5 billion to $20 billion under his watch.

As for his time in Africa, Walden-Newman and his college girlfriend eventually saw the error of their ways. They married, creating a new, hyphenated name and returned to Senegal, where he took a post–Peace Corps job as a State Department contractor for the U.S. Agency for International Development. The Nebraska official says he was hired because he was the only American who spoke Jola, the regional language, fluently. “I still dream in Jola when I dream about Africa — it’s the damnedest thing.”

This article is the second of a three-part series of profiles of heads of state retirement system investment offices.

Follow Frances Denmark on Twitter at @francesdenmark.

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