The New Mexico State Investment Council, with more than $20 billion in assets under management, is the second largest sovereign wealth vehicle in the U.S. It traces its history back to land grants in the late nineteenth century. Today it oversees four separate funds and a widely diversified asset base.
Deputy State Investment Officer Robert “Vince” Smith talked with Sovereign Wealth Center’s David Evans about shifts in the portfolio, and the investment environment going forward. The interview has been edited for space, grammar, space and context.
SWC: What are your priorities for 2015?
The [New Mexico State Investment] Council is still in the midst of a very large, multi-year redeployment of its assets, we’re moving from a publicly-traded portfolio — mostly equity investments — to a more diversified portfolio mix, with a large allocation to the private markets. Previously the Council had been very heavily equity-oriented; the exposure to stocks was as much as 85 percent.
We’ve raised private equity from 8 to 12 percent of the portfolio, and real estate from 3 to 10 percent. We’re also targeting what we call real return: hard assets like infrastructure, timber, energy, those types of assets. In infrastructure, we’ve been accessing European markets, a little bit in Australia and a little bit in Asia. We’re also investing in private debt.
SWC: What attracts you to private debt markets?
Prices on all assets are elevated, and I think some investors are overpaying for liquidity and short-term safety in the bond markets. But we’re finding acceptable returns in private debt; not nearly what we saw four or five years ago, but acceptable on a risk-adjusted basis relative to the publicly-traded markets.
There are still opportunities in the distressed debt space; we’re addressing those through PIMCO [Newport Beach, California-based fixed income specialist Pacific Investment Management Co.]. We’ve got a European private equity fund accessing assets being sold by European banks, and we’re also looking at floating-rate debt opportunities here in the U.S. We’ve got one fund manager that’s accessing student loans, for example. There are some good yields there.
SWC: What strategies are you implementing in equities? Have you looked at so-called smart beta strategies?
We’ve been funding our increased allocation to private markets through equity sales, so the allocation to stocks has gone down. We’ve been implementing smart beta in the domestic equity portfolio and we’re now looking at extending that into the international equity portfolio, mostly to create some downside protection in those portfolios.
SWC: Sovereign wealth funds have shown strong interest in health care and technology of late. What’s your view on those two sectors?
There’s certainly been interest in health care and technology — health care’s been in a secular upswing with baby boomers retiring, and technology companies are showing pretty good growth stability and launching must-have consumer products. But I wonder if the interest in those two sectors is more a reflection of a lack of interest in other sectors. Here in the U.S., the consumer sector has been hit by the lack of strong wage growth, and exporting companies are facing a steeply revalued U.S. dollar. So if you pick through the sectors you find that many others are struggling.
SWC: Are there any other sectors that you think might offer good value?
I’d go out on a limb and say energy stands a good chance of rebounding later this year and in the first half of 2016. And that might have a knock-on effect on the high-yield debt, as energy is a big component of that [market]. It’s possible you could see some supply constraint and corresponding price moves in the agricultural sector, too.
SWC: Thanks for taking the time to share your insights.