Accelerant is excited to announce that Len Santoro wil be joining the firm as a consultant. Len is the former CIO of Prudential's pension fund business. He will be joining us to consult and provide expert testimony on fixed income, mutual funds, institutional asset management, and pension related areas.
A Q&A with Len is transcribed below:
Brendan Reese for Accelerant: Describe your professional background?
Len Santoro: The bulk of my investment management experience was at the Prudential. I was hired directly out of Columbia Business School to manage the Pru-Bache mutual funds and a pension fund for the Western Conference of Teamsters. A few years later I was part of a team that was formed to increase Prudential's presence in the pension fund management business. I eventually became the CIO of this unit which at its peak had assets under management in excess of $27 billion and a staff of 27 investment professionals.
Reese: What kind of fixed income did you deal with?
Santoro: We were a global manager. Given that, about 75% was in the investment grade US market. The rest was in High Yield, Emerging Market and non-US government debt.
Reese: How closely did you work with your pension clients in drafting their Investment Policy Statements?
Santoro: That really depended on the client. Some were quite sophisticated and provided detailed investment objectives and guidelines. I'm not talking just about sector and quality Limits but guidelines that included the duration range around specific market sectors and even coupon distribution in the mortgage sector.
Other clients needed more guidance. In many cases proposed guidelines were included in the original RFP and were intended to link risk and reward. Exploring the potential risks associated with large duration, sector and quality bets were key elements in establishing the guidelines and objectives of the portfolio.
Reese: How frequently did you see pensions change their IPS and what would be a typical impetus for that. Also, what kind of issues would that raise from the asset management perspective?
Santoro: I recall a few instances when clients change both the portfolio objective and it's benchmark. Both clients were very sophisticated. In one case I remember getting a call at 11 o'clock in the morning and it was changed by the end of the day. In another case, weeks of discussion preceded the change.
In another instance I recall an investment opportunity being presented that was not specifically permitted in our guidelines. I reached out to the client and if I remember correctly within a month a change to the guidelines had been approved.
In most cases though, changes occurred due to some event that caused a violation of the guideline. I remember back in the 1990s when one of the automobile credit companies was surprisingly downgraded to junk. Suddenly the market was being flooded with the paper because so many investment-grade portfolios had the same restriction of no junk. We went to our clients looking for 6 month relief to let the selling pressures ease. Again, it was a relatively easy process and our request was approved.
It is Important to remember that in many cases the guidelines evolve as situations change. For example, assume the guidelines say that nosecurities shall be purchased with a non-investment grade rating. Does that mean that a bond purchased with a triple B rating and is later downgraded to below investment grade needs to be sold? Clearly a conversation needs to be had between the client and the manager. Same type of example applies to maximum positions in individual securities or sectors. I recall in some situations where a maximum sector position at purchase was set at 25% but in no case would exceed 30% as a result of changes in market value. In this case both the client and the manager knew exactly how the portfolio should be positioned and what actions would be taken.
Reese: Tell me about the world of Taft Hartley asset management? What is it and how does it work? How is it different?
Santoro: A Taft Hartley pension plan involves a group of employers and one Union. In my experience the plan is run by a Board consisting of an equal number of employer and union representatives.
The pension is the result of a collective bargaining agreement. In managing assets there is absolutely no difference between a Taft Hartley and a single employer sponsored plan. The objective, guidelines, and benchmarks are all very similar.
The biggest difference can be with client service and reporting if the manager is required to meet with the entire board. In some cases, however, the plan uses an Investment Advisor that fills a role that the chief pension officer would have at a single employer sponsored plan. In that case there is absolutely no difference (between their roles).
Reese: Throughout your long career watching the fixed income markets, what month or time period comes to mind as particularly interesting and exciting?
Santoro: I think the Paul Volker era was one of the most interesting periods. The vice he put on the money supply to break the back of very high inflation was unprecedented and controversial. Heck even in 1981 there was still doubt that he would be successful. It was in that year the U.S. Treasury needed to put a 14% coupon on a 30 year bond! His success has been well documented.
October 1987 was another interesting period. Those of us long enough in the tooth recall the stock market plunge, but little noticed the volatility in the bond market. The long bond which normally traded with a bid/ask spread of a "32nd" ( a "32nd" amounting to $312.50 on a million dollar bond) suddenly traded at 2 or 3 point spreads ( a point being $10,000 on a million dollar bond). This presented difficult problems for us since we had clients looking to add in excess of a billion US dollars to their bond portfolio.
The demise of Drexel was interesting in that it put counter-party risk back on the front burner which I am sure was was nothing compared to the chaos of Bear, Lehman and the 2008 crisis.
Reese: What are some interesting developments you've seen in the bond market recently?
Santoro: These bank "CoCo" bonds are pretty interesting. The CoCo stands for contingent convertible and are being issued as a safety net for the banks to maintain minimum capital levels under the Basel agreement. They are either converted into stock or written down entirely if the banks capital level reaches a certain trigger point.
The bond can never be converted to stock at the option of the bond holder. In some cases if the trigger, defined in each deal as somewhere between a 4% and 8% capital ratio, is breached the issuer can convert the bonds to stock or in some cases write down the value of the bond entirely.
Some of the early research indicated that the market for these bonds was the retail investor. That is clearly not appropriate. The securities and the risk associated with them are way too complicated for a naïve investor. In fact I believe the UK has banned sales to the individual market. In addition I saw a recent HSBC deal that establish minimum lots of $200,000 which in effect minimizes retail participation.
Reese: What are some of your other interests?
Santoro: I love the markets, Italian cooking and my 2 Labrador retrievers.