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A New Investment Chief Needs to Turn Around a Languishing Pension

After the top job was empty for two years, “It’s going to take a while to turn the ship around,” says Mike Malchenko.

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Mike Malchenko has a big job ahead of him as the new investment head for the Santa Clara Valley Transit Authority.

Overseeing more than $3 billion in combined pension, OPEB (‘other post employment benefits’), cash, and spousal support pools, Malchenko took over the role in April after it was empty for two years. He joined VTA from NEPC, where he had served as a consultant for years.

Malchenko’s post was vacated by Sean Bill in 2022, who has since gone on to become the chief investment officer for private credit firm Prime Meridian Capital Management. Since then, the Transit Authority fund has languished, its board approving actions that it needed someone beyond its consultant to carry out. “Deferred maintenance” is what Malchenko calls it.

“It’s going to take a while to turn the ship around,” Malchenko said. “When investments start to be realized, we can start to think about reconfiguring implementation and manager searches. We’ve got commitments to make and strategic plans to put into motion.”

In November, for example, the board approved a new asset allocation that reduces public equities by six percent, moving that capital into tradeable credit. Until Malchenko joined, the fund was sitting on the change.

There is also deferred action needed in real estate. In 2022, the board approved a decision to redeem from a real estate fund that has a long queue to get out. Finally, with Malchenko at the helm, the fund will move ahead with submitting its redemption request. But it will take five years as the firm works through a long line of other funds waiting to redeem their shares.

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Something similar is taking place within the VTA’s hedge fund allocation. The fund’s mandate is to invest in absolute return strategies with low correlation to other asset classes in the plan and low overall volatility.

The fund had allocated to two managers, but one “essentially contradicts” its objective, Malchenko said. The VTA submitted a redemption request nearly two years ago, but the manager put up a 10-year gate, paying out 10 percent per year. “It’ll take a while to turn the portfolio construction within absolute return around,” he said.

The changes have been slowed by the board’s decision to also hire a new investment consultant. At a recent meeting, the board approved the decision to hire Meketa to replace NEPC, its longtime consultant.

“Another hiccup is the change in consultants,” Malchenko said. “We are walking the tightrope between getting things done, decisions being made by the previous consultant, and the new consultant coming in.”

He added that the board expects to approve a new asset allocation in the fiscal year to come. Malchenko wants to see the board add a larger allocation to alternatives. As of 2023, the VTA had allocated four percent of its assets to private equity and had invested in the asset class via a fund of funds in 2021. The vintage year presents performance challenges, as the VTA invested at what was essentially the top of the private equity market. However, Malchenko is optimistic that it will rebound.

Elsewhere in alternatives, the VTA has five percent of its portfolio allocated to diversified real assets and nine percent invested in private credit. “The highest performing DB pension plans have a pretty hefty slug in alternatives,” Malchenko said. “I’d like to see it grow, but we have other investment battles to fight before we do that.”

Despite being slower to adopt bigger allocations to alternatives, the VTA isn’t exactly old school. Under Bill, its previous investment chief, the fund allocated capital to Bitcoin and Ethereum. Bill helped modernize VTA’s asset allocation during his ten years at the fund, adding more complex asset classes like private credit and absolute return hedge funds.

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