Michael Trotsky, the executive director and chief investment officer of the Massachusetts Pension Reserves Investment Management Board, will be honored with Institutional Investor’s Lifetime Achievement Award at the third annual Allocators’ Choice Awards on December 3 in New York.
In his nine years of shepherding the $74.8 billion state Pension Reserves Investment Trust, the pension executive and former hedge fund manager has built a benchmark-beating portfolio, put together an award-winning team of investors, and nearly doubled the fund’s assets under management while saving the retirement system hundreds of millions of dollars in excess costs.
Trotsky — who describes himself as a “closet quant”— has also been responsible for modernizing the PRIM investment office, implementing new risk management and manager selection tools using statistical and quantitative techniques. The pension chief’s emphasis on statistical analysis dates back to his first professional job as an engineer at Intel. He took the role after studying electrical engineering as an undergraduate student at the University of Pennsylvania, but Trotsky says he always knew he wanted to get into investing.
“My father was a stock market junkie — he loved it, but he wasn’t so successful at it,” he says. “I always thought there was a better way, and I learned from him my deep-seated personal investment philosophy, which is that I am basically a contrarian at heart.”
Ultimately Trotsky left Intel to pursue an MBA at the University of Pennsylvania’s Wharton School. Then he landed a position as a semiconductor fundamental analyst at Independence Investment Associates, a “hybrid quant/fundamental shop.”
“I learned early that fundamental analysis can be aided by quant techniques and vice versa,” Trotsky says. “I still believe that today, and it informs every investment decision we have made at PRIM.”
Trotsky eventually became a partner and senior vice president — and met his wife, Amy, then a bond analyst at Goldman Sachs. After seven years, he left to join his college classmate Larry Greenberg at his hedge fund firm, Greenberg-Summit Partners.
Trotsky would continue his hedge fund career as a portfolio manager at PAR Capital Management, a hedge fund firm in Boston.
“PAR might be the most successful hedge fund in the world that nobody knows about because they never raise capital, stay small, and focus on narrow parts of the markets,” Trotsky says. “At the time I left there was no fund in America that outperformed them.”
Like most asset managers, however, PAR had a “tough run” during the global financial crisis, and Trotsky left the firm in 2009. One year later, he was appointed executive director at MassPRIM (the CIO title would come in 2012).
“The PRIT fund had just suffered big losses, and trust in investment management was at an all-time low,” Trotsky says. “I wanted to give something back; I wanted to learn about other asset classes; I wanted to manage people. It was a perfect opportunity and time in my life to join PRIM.”
It was his first role at a government organization after a 25-year career in the private sector, and he “learned quickly and sometimes painfully that sometimes the best political decision is not the best business decision,” he said. “Often, I’ve had to stand up to very powerful people to fight for what I thought was right for the fund and the organization.”
One such fight included Trotsky’s campaign early in his tenure at PRIM to increase his team’s compensation, a move that had been opposed by then-treasurer Steve Grossman. At the time, PRIM had been struggling to retain key employees due in part to the pension fund’s inability to offer salaries commensurate with private-sector financial jobs or even roles at other large pensions.
Trotsky won board approval in December 2012 to grant a total of $298,000 in raises — and the fund has since been able to assemble a team that Trotsky would put up “against any in the private sector.”
“I am very thankful for the support that I get from our excellent board and committee members,” he says. “In particular, Treasurer Deb Goldberg when she was elected five years ago quickly grasped the importance of our mission and has been a key enabler to everything positive that has happened at PRIM.”
Beyond navigating the political aspects of pension management, Trotsky has been instrumental in revitalizing PRIM’s investment portfolio, streamlining its hedge fund investments developing a strategic allocation that emphasizes high risk-adjusted returns.
“When I joined PRIM, they had 207 underlying hedge funds managed by five different funds-of-fund providers who charged about 80 basis points on top of the 2-and-20 that the hedge funds charged,” Trotsky says. “Add to that the fact the before I got there, PRIM was invested in Madoff and a few other funds that got in trouble — and I very quickly determined that was not the direction I wanted to continue in.”
Under Trotsky’s leadership, PRIM dropped funds-of-funds in favor of direct investments in hedge funds via separately managed accounts — becoming among the first pension funds to use that structure, according to Trotsky. Today, the fund has about 25 different hedge funds in its portfolio, all used “in the truest sense of the word ‘hedge,’” Trotsky says. “You won’t find a lot of equity-centric funds.”
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PRIM under Trotsky has also expanded into alternative asset classes, like agriculture and direct real estate, and built a private equity portfolio that has consistently ranked in the top-five of the American Investment Council’s annual study of private equity returns by U.S. public pensions.
Overall, PRIM has delivered a net-of-fees return of 9.9 percent for the ten years ending on June 30 — beating its core benchmark by 1.6 percentage points. At the same time, PRIM has identified $170 million in annual cost savings and value enhancement activities through its Project SAVE initiative, which it launched in 2013. “We’ve had a maniacal focus on the three pillars of return, risk, and cost,” Trotsky says. “We make sure every active manager earning active manager fees has skills.”
Trotsky says each phase of his career has been different, but he’s happy to be where he is now.
“I love what I do and I love the organization and the mission and I am deeply thankful for the support that our board and committee have given us,” Trotsky says.
The Lifetime Achievement Award will be presented at dinner at the Mandarin Oriental in New York City, following an afternoon Masterclass of discussion among an exclusive group of asset allocators and managers, where attendees will share, debate, and tackle institutional investing’s intractable problems.
Other awards to be presented at the third annual Allocators’ Choice Awards will include “Turnaround of the Year,” “Investment Committee/Board of the Year,” and “Advocate of the Year,” a new award to recognize allocators who have fought effectively for their members, organization, or profession.
Winners will be chosen by peer voting. Allocators can request an invitation to the Masterclass and dinner.