Nowadays it’s rare to find someone who has been with the same company for their entire working life.
But for Tom Lopez the Los Angeles Fire and Police Pension fund (LAFPP) has been something of a vocation and he has dedicated 32 years to the financial future of those who protect and serve his community.
‘Fire fighters and the police play a vital role and everyone in our department realises that we have a very important clientele.
‘And as I remind my investment officers, you also want to keep in mind that most of our retirees have guns,’ he tells me jokingly from his base in Los Angeles.
The CIO of the $16.7 billion public pension fund has lived through more crashes and bull markets than he cares to remember and admits that from his old group of investor friends that started their careers back in the early 1980s, he is now one of the few still working.
More than three decades with the same group has given the LA born investor, who joined the LAFPP straight out of college, a deep insight into today’s investment industry. All of his pension fund’s investments are managed by external managers and he has established some lasting relationships over his tenure.
One thing he’s come to understand as essential for every fund manager is to have a passion for their work. For Lopez this unfaltering enthusiasm is one of the sure marks of success and he’s seen its power in business people at the very top of their game.
‘Over the years I have talked to a number of billionaires in the office and, as rich as they were, they couldn’t resist doing marketing for their company.
‘Even though they could buy a couple islands for themselves they want to show up and continue to work, ’ he says.
The Los Angeles Fire and Police Pension fund (LAFPP) was founded nearly 100 years ago. It is a defined benefit single-employer pension plan covering all full-time firefighters, police officers, and certain Harbor Port Police officers of the City of Los Angeles.
It currently has $15.5 billion of assets under management and has over 13,000 active members and over 12,000 retired.
Drawing in the horns
Over the last 30 years the LAFPP has evolved from being known as the US public pension fund with one of the most aggressive asset allocation strategies among its peers, says Lopez, to one with a more conventional approach.
‘We were one of the first public pension funds to go into high yield bonds, among the first to add small-cap stocks in big quantities and we had a much higher real estate allocation than other public funds.’
By today’s standards, the LAFPP’s asset allocation is pretty average, says Lopez. However, alternative assets represent an important portion of his current portfolio, with private equity and real estate accounting for around 8-9% each.
The incremental rise of alternatives within his portfolio over the last few years has now seen Lopez and his team make their first foray into the commodities market.
With most of his portfolio risk tied up in public equities both domestic and global, Lopez says commodities offer him equity-like returns as well as diversification away from more traditional equities.
‘The big change is the addition of commodities as an asset class and we are doing it a bit differently from other funds. We will be tapping into them through private equity, public markets and also futures indices.’
The uncertainty over how the correlation between equity markets and commodities will evolve has led him to hedge his exposure in this area.
‘We are trying to expand and go beyond the conventional commodity indices and include MLPs [Master Limited Partnerships], timber and water.’
So far the only commodity strategy they have up and running is managed by private equity specialist Portfolio Advisors. The independent Connecticut-based firm has offices in Zurich and Hong Kong and currently runs more than $30 billion across a number of products including private equity and private real estate funds of funds.
One significant change to his alternative exposure over the last year was to end his collaboration with Los Angeles-based Dorchester Capital, a fund of hedge funds group. This was a rare case where the decision to sell was not performance related, says Lopez, but due to the fund manager’s decision to reduce the number of products on offer.
‘They were the most successful fund of hedge funds managers in our program but they were closing the one we were in and we didn’t want to switch to their more aggressive product,’ he says.
Please visit our full site to view this interactive chart
Back from extinction
Having started his career at the start of the 1980s, Lopez recalls how the advent of the internet changed the manager selection industry.
Access to information has increased exponentially from the days when one of the most valuable assets selectors had was access to a Lexis Nexis terminal – a pre-internet pay-as-you go electronic archive of research reports and articles.
‘Getting data on managers is easier than it used to be. The good old days weren’t all that good,’ recalls Lopez.
‘It never ceases to amuse me to see products that went extinct, and for good reasons, get resurrected as if they are something completely new.’
One example he cites is option overriding which is being touted by some major investment firms as a hot new product.
‘It is something we had experience with in the 80s, it didn’t have many practitioners and it went under due to the bull market they were fighting against.
‘Management firms are always looking for the latest thing and it can happen that someone’s big idea gets funded before everyone later realises it’s already had its day.’
Seeking new stars
While investment firms roll out their ‘new products’, Lopez is looking to add some new managers to his roster by the end of the year.
Aside from his commodities bet, he is also hunting for a Reit manager, an international equity manager and another private equity specialist.
His search for an international equity manager follows the expulsion of Artio Global Investors from his list - a US-based asset manager recently acquired by Aberdeen Asset Management - which generated lower than expected returns. He has also recently dropped Delta Asset Management from his US equity portfolio.
He has allocated his US equity exposure to AllianceBernstein – which has US equity specialists James McGregor and Kurt Feuerman on its domestic team - Robeco Boston Partners, which counts former Citywire Euro Stars rated manager Duilio Ramallo among its manager line-up, as well as Attucks Asset Management, among others.
His current stock of international equity managers includes high profile groups such as BlackRock which runs a global equity ex US index fund and Baillie Gifford which manages an ex US global equity portfolio.
Brandes Investment Partners also features on this line-up. The value specialist group was founded by Charles Brandes in 1974 after he had a fortuitous encounter with Benjamin Graham, widely recognised as the father of value investing and mentor to Warren Buffett, when he worked on the front desk of a small brokerage firm in California.
‘It’s very difficult to pick active managers that will outperform,’ says Lopez. ‘There are managers out there that can do it but the odds of you finding them or becoming part of their investor base are slim.
‘The important thing is whether or not the team and portfolio manager really enjoy what they are doing, that they have a passion for it. Those are the most successful ones over the years that we have come across.’
Although the pension fund’s board has tended to favour more index-driven strategies over the past few years some active managers have continued to justify their inclusion.
In this case Lopez singled out US small-cap managers Deruma Asset Management and Boston-based Frontier Capital.
‘We don’t have a US small-cap index fund because the small-cap managers we have on board have done an outstanding job for us.’
Both of their products soft-closed last year, says Lopez but he has been investing in New York-based Deruma AM for 20 years and Frontier Capital for over a decade.
‘Years ago we had a much more eclectic line-up but that is not really the case right now. We used to have more active managers so we had a much bigger list of names working on the portfolio.’
‘The index portion of our large-cap domestic equity portfolio has been ticking upward over the years. We have added indexing in our international portfolio as well as in our fixed income segment.’
Among the lesser known names he has in his portfolio Lopez mentions Washington-based boutique Reams Asset Management and LM Capital, both of which run his US opportunistic fixed income portfolios.
Biography: Tom Lopez
Tom Lopez has worked in the investment section of the Los Angeles Fire & Police Pensions fund for more than 32 years. He was named CIO of the department in 1993 after joining in 1981.
An avid cyclist in his spare time, Lopez has made a number of long distance cross-country expeditions. He has cycled across the US and has also toured the UK twice, one of them for two and a half months where he took in the sights in England and Scotland.
When he’s out of the office or the saddle, Lopez enjoys a good read. His latest recommendation is Breakout Nations by Ruchir Sharma.
This article originally appeared in the September issue of Citywire Global magazine