Long term commitment

Victor Raskin is giving retirement another go after a decade managing the $4.5bn YMCA Retirement Fund. He officially retired ten years ago, but was lured back by the prospect of managing the investments of one of the oldest pension plans in the country (the YMCA Retirement Fund was established in 1922). The YMCA fund has a unique structure in that it’s a defined contribution plan, managed like a large defined benefit plan. 

Raskin has spent 42 years in the investment industry both on the buy-side and the sell-side. That doesn’t include his time spent using his birthday money as a 13-year-old boy to pick and invest in stocks. “In four years I took the $200 to $800. Then I went off to college and became very conservative. I sold everything and invested it in AT&T. Over the four years I was in college, I think it went down by half.”

Raquel Pichardo-Allison: Is this a real retirement? 

Victor Raskin: There are some who would doubt it, but yes. After 42 years in the industry, it’s enough. I have no plans at the moment. However, to keep my mind from turning to mush, I am seeking some board seats on either a hedge fund advisers’ board or mutual fund board, or anything that seems intriguing. 

Raquel Pichardo-Allison: How different does the YMCA Retirement Fund look now than it did ten years ago?

Victor Raskin: We went from $3.4bn to $4.5bn – clearly not in a straight line. When I got there, it was more than 50% bonds and a little less than 50% stocks, all internally managed. 

Now we’re very diversified and all is externally managed. Bonds are down to 24%, stocks are still about 50% but we have a large alternatives allocation making up the rest. 

Raquel Pichardo-Allison: What ‘products du jour’ have you seen over the past 40 years and are there any you’ve invested in? Any you’ve regretted? 

Victor Raskin: Forty years ago there were stocks and there were bonds. There have been a lot of new products. Options came and they got expanded. Hedge funds have been around, but not necessarily institutionalised for a long time. We went into hedge funds in 2002. We were sort of on the leading edge of institutions going into hedge funds, and we’ve continued to build on that asset class.

We tried active currency for a couple of years. We didn’t make any money, but we didn’t lose a lot. We decided it wasn’t for us and we exited. 

We also implemented portable alpha. Many in the industry have exited, but we have stuck with it. You have to remember portable alpha by definition has leverage in it because you have 100% exposure to your beta source, and whatever your alpha engine is, it better be positive. 

Raquel Pichardo-Allison: Twenty years from now, will people still be talking about portable alpha? 

Victor Raskin: Probably not, because there’s always a new idea. 

Raquel Pichardo-Allison: Are there strategies coming out now that you think just aren’t going to work? 

Victor Raskin: Well, we looked at risk parity and rejected it immediately because there is leverage involved to do that. If you want to equalise your risk by asset classes, you end up levering up low returning bonds, for example, and interest rates could go against you and you can get hurt significantly. So we rejected that outright. 

Raquel Pichardo-Allison: Can we compare you to a DB plan? 

Victor Raskin: It’s a little different. The goal of a corporate DB plan is to get to 100% funded, lock the doors down and never have to make a corporate payment again. We are 91% funded. The S&P 1500 companies collectively were funded at 78% at the end of October. So our goal is to get back to 100% as well, but we can’t just go and lock the doors because our plan’s regular interest is only 3% without extra credits. We have a more difficult job than DB plans. We have to protect the downside because we have no deep-pocket corporate parent. (Meanwhile) on the upside, if we don’t have good performance, our members, the individual YMCAs, could move to Fidelity, or Dreyfus, or whoever they want. So we have to provide an adequate return. 

Raquel Pichardo-Allison: What is ‘adequate’? 

Victor Raskin: It’s more than 3%. Our expected rate of return is 7.3%, so I would say we need to get somewhere in the 5%+ area annually.  Because of our fund structure, our participants did not lose any money in the down draft. Their balances remained the same. So their balances don’t move with the market as a typical DC plan would. 

We went from a surplus to a deficit, so we funded it by smoothing it out. They’ll continue to get 3% annual credits until we can get back into surplus territory. So markets may go up 20% and our participants are only going to go up 3%, but they were protected on the down side. 

This plan has not changed since 1922, so the people who structured it did a great job. I have long argued in all the shops I’ve been at that individuals do not have the background to make investment decisions.

Raquel Pichardo-Allison: Will we see more hybrid plans structured like the YMCA in the future?

Victor Raskin: You see a lot of movement away from DB plans. We are basically a sort of cash balance plan because the Y’s will make a contribution for Mr. Jones of X, and twice a year the fund earns credits, and you have a certain amount of money under your name when you’re ready to retire. 

If the trend moves to cash balance, that will be more like ours, but I don’t think they will take choice away from the individual as we have. If you go back to the late 90s, there were a lot of participants in our plans screaming for choice because our credits weren’t going up as fast as the market. 

We as a fund decided to be very paternalistic and decide that we had a better view of how asset allocation should be than the individual participant. Then of course, the decline after the tech bubble in 2000, when that market burst, our participants didn’t lose any money and there hasn’t been a squeal for choice since. 

All these TV shows came out and tried to tell the individual, ‘All you need are the tools and you to could manage money’. You could give me a doctor’s black bag but that doesn’t make me a doctor. 

Raquel Pichardo-Allison: You’re leaving at an interesting time for the world and US economy. 

Victor Raskin: I have an optimistic view. Coming out of the bottom in March 2009 we talked about a recovery driven by inventory and other factors. Then we were afraid of a stall in the second half of 2010, and then we thought it would gain traction in 2011. 

So far everything has been right, except I don’t know if I’ll be right about 2011. When I talk about gaining traction, I mean the US gross domestic product growing at 3% to 3.5%. We’re at 2% for the third quarter 2010. Looks like the fourth quarter will be higher. Part of it is driven by export in the strength of emerging markets. 

We got some signs in October that the macroeconomic numbers were better, whether that was employment or retail sales, etc and I think there are signs that things are getting a little healthier. But we still have a lot of headwinds. Unemployment is not coming down rapidly. It’s going to be slow to get there, but I think we are going to gain some traction. 

Raquel Pichardo-Allison: If you had one more year, how would you be positioning the portfolio to take that into account? 

Victor Raskin: I would be reducing my fixed income exposure because I think rates are going to go up. I would be reducing our exposure to agency mortgages because they are negatively convexed. And I have looked, but have been unsuccessful with my committee, to put on hedges for the portfolios, but we’d be looking to put hedges on our equity exposures when appropriate. 

Raquel Pichardo-Allison: What’s the biggest question mark hanging over the pension industry in the US?

Victor Raskin: I think the corporations, the DB world, can’t live with volatility and is inclined not to want to put in new money. That’s why I think the trend towards DC will continue. 

Raquel Pichardo-Allison: What is the most important lesson you’ve learned over the past 40 years? 

Victor Raskin: There have been many of them. If it looks too good, it is too good. Leverage kills. And, do business with people you really respect and are of the highest integrity, whether they’re the smartest or not. 

Raquel Pichardo-Allison: Will you miss it?

Victor Raskin: I will. It’s been my passion since I was 13 years old.