Starting a new job is a daunting task for anyone, but that was especially the case for Andrew H. Junkin, new CIO of the Virginia Retirement System, who joined VRS after the plan posted a strong two years of performance.
In fiscal year 2021, the $96.8 billion defined benefit fund recorded a 27.5% return, and in fiscal year 2022, the fund reported a net return of 0.6%, well exceeding its benchmark of -5.5% and landing above most of its peers.
"As a CIO, to come in and to follow those two years is a pretty daunting task," said Mr. Junkin, who joined VRS in September and officially took over for former CIO Ronald D. Schmitz after his retirement in January.
Mr. Junkin, who previously served as CIO of the Rhode Island State Investment Commission, Providence, said he joined VRS because "providing safe and secure retirements to close to 782,000 participants and beneficiaries has some real meaning."
The portfolio was already in great shape when he joined, Mr. Junkin said, adding, "I didn't need to come in and be a change agent."
The plan has about $61 billion in alternative investments, which is mostly made up of private equity, real assets and credit strategies, Mr. Junkin said. According to its Sept. 30 investments report, the system allocates 19% to private equity, 16% to real assets, and 15.2% to credit strategies.
VRS also has 2.7% committed to private investment partnerships — a combination of private equity, private debt and private real assets — which are included in alternatives as well, Mr. Junkin said. The last $10 billion or so comes from equity long/short managers, he added.
As to why the plan has performed so well, Mr. Junkin attributed its success to a high-quality private equity portfolio, "a slightly defensive bias in our public equity portfolio, which in a down year paid off," and "a value tilt throughout the public equity portfolio."
The plan allocated $23.1 billion, or 23.9% of its portfolio, to public equity as of Sept. 30.
"The team has been very, very thoughtful about how to approach the strategic goals of investing the portfolio with our long-term target asset allocation, but also, at an implementation level, being very considerate of shorter-term trends," Mr. Junkin said.
In a follow-up email, Mr. Junkin said, "We carefully monitor and manage liquidity for the plan and haven't experienced liquidity issues. We have already seen some write downs in our private asset classes, but those have largely been in line with expectations, given public market returns."
While he worries about inflation, Mr. Junkin said it's not a new issue, and "the real assets portfolio does a lot of the heavy lifting" in terms of inflation protection, which is made up of mostly real estate, as well as infrastructure, timberland and farmland.
When asked about his views on ESG, Mr. Junkin said the fund considers all relevant information about a particular investment, "some of which is not going to show up on a balance sheet or an income statement."
For example, in the real estate portfolio, the plan may consider LEED-certified buildings, but is not solely focused on their energy efficiency. To them, criteria such as energy efficiency is another investment risk.
"We're really focused on just risk and return," Mr. Junkin said. "But risk sometimes wears different labels."
One risk that many are weighing right now is the possibility of a recession, Mr. Junkin noted.
"If there is a recession, it is probably going to be the most anticipated recession in the history of all recessions," Mr. Junkin said, though it's still unclear what the outcome will be.
This is why VRS remains slightly defensive in its public equity portfolio, he explained. In a follow-up email, Mr. Junkin said the plan remains defensive with "exposure to low volatility equity strategies and, typically, (keeping) our beta below 1.0."
Mr. Junkin noted that "the event risk associated with geopolitics is one that no investor can escape," citing Russia's invasion of Ukraine last year as an example.
However, he also said "there's a risk of overthinking things" when it comes to risk management.
"We just remained focused on our long-term goal of the return necessary to keep the pension plan healthy and upon its journey towards providing benefits to all the beneficiaries," Mr. Junkin said.
As of June 30, the pension plan is 81.8% funded on actuarial value and 83.4% on market value. Its assumed rate of return is 6.75%.
