# Team Opers Chats Cash Collateral Reinvestment

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[00:00:00.000] Hello, welcome to another Global Peer Financing Association Peer Connections podcast.
[00:00:05.540] For anyone who missed our first podcast, which covered OPR's approach to our securities lending
[00:00:09.680] program, I'm Greg Cochran, an analyst on the Cash and Securities Lending team here with Ohio
[00:00:15.040] Public Employees Retirement System, or OPRS. Today we have Jerry May, Senior Portfolio Manager at
[00:00:20.960] OPRS back with us, as well as Michael M.J. Locco, an Associate Analyst on the Cash and Securities
[00:00:26.860] lending team. MJ joined Oprah's earlier this year and was previously with the treasurer of state
[00:00:31.240] here in Ohio. Welcome to both of you and a huge thank you to everybody listening. So today we're
[00:00:36.580] going to go over our cash investment program and our approach to that. So I'll start with Jerry.
[00:00:42.560] What is Oprah's investment philosophy when it comes to cash investment? Well, Greg, the cash
[00:00:48.180] team seeks to maintain principle. We don't want to lose money. We want to provide liquidity when we
[00:00:54.000] need to. So we have to stay short, stay liquid, and we want to earn a competitive yield with what
[00:01:00.520] other options are out there in the market. So that's the basic premise on which we're going
[00:01:05.280] to build the investment philosophy here at Opers. We do that through a number of choices that we
[00:01:10.620] make through our guidelines and through our portfolio policies, not the least of which is
[00:01:14.960] we want to be diversified. We want to hold high quality assets. We probably want to have a little
[00:01:21.000] bit of a sell bias. So if there's volatility in the market, we don't want to hold that security
[00:01:25.920] that may be volatile right now. We want to sell that just to get out before things go south.
[00:01:31.840] And we might even say that we have a contrarian approach. So we want to add risk when others
[00:01:38.740] are averting that risk. So that would be at the bottom of the market. And we want to avoid risk
[00:01:44.540] when the value isn't there. So that would be at the top of the market. We're also watching where
[00:01:50.580] the market cycles are so that we can determine where we want to be in terms of that approach.
[00:01:56.620] So at the general level, that's really what we're looking for in an investment philosophy
[00:02:01.120] for the cash portfolios.
[00:02:02.800] With that being said, how has the program changed over time from when you arrived here
[00:02:09.180] at OPRS through the financial crisis of 2008 and through the pandemic that we're seeing?
[00:02:14.480] Well, when I got to OPRS, all of the cash was managed externally.
[00:02:19.060] We began managing the cash internally within the first year of my being here.
[00:02:25.240] So sometime in mid to late 2004, we started managing cash for the total fund.
[00:02:31.060] We then began doing a little bit of investing of our securities lending cash collateral
[00:02:37.300] in some point in 2005.
[00:02:40.040] I would say that over the course of the last 16 years, we really haven't changed much in
[00:02:47.040] terms of guidelines or approach. The guidelines, I think, are still the same that we originally
[00:02:52.980] wrote. So we really haven't adjusted those. What we have done, though, is take a more concise view
[00:02:59.420] of the risks that we want to mitigate. And the ones that appeared during the financial crisis
[00:03:06.720] in 2008, in particular, we're still very cognizant of those risks. And we watch those very closely.
[00:03:12.960] So I think that approach has helped us during this recent pandemic.
[00:03:17.820] We want to stay very liquid.
[00:03:19.600] We want to stay diversified.
[00:03:21.320] And by doing that, I think that helps with our returns and liquidity of the portfolio.
[00:03:26.820] So you just mentioned risks.
[00:03:28.960] What are some of the risk flows on the cash investment side of the program?
[00:03:32.460] And how do you go about mitigating them, as you mentioned?
[00:03:35.820] There's really three primary risks that we're monitoring in the cash portfolios.
[00:03:41.500] The first one is liquidity risk. That means basically that we want to have the ability to have cash on hand to meet demands of the plan or the portfolio. We mitigate that through our guidelines, at least in part, and through our approach managing the portfolios where we have allocation to overnight maturities, a focus on short-term assets that quickly mature, especially during quarter ends or transitions that we see where liquidity is needed.
[00:04:07.980] The second risk is spread duration risk, and that's the risk that you would have from a mark-to-market price movement on, say, a longer duration risky asset that would be measured primarily by the weighted average maturity or the final maturity within the portfolio.
[00:04:26.880] To mitigate that, we focus on higher quality assets. We hold a significant portion of our portfolios, both of our total portfolio cash, as well as our securities lending cash. We hold a significant portion in treasury and agency assets, and we diversify among asset types. So we try to mitigate through those steps.
[00:04:50.340] The last one is interest rate risk, and that's the measure of the portfolio's sensitivity to interest rate changes. That's the primary risk that we would see in having the WAM to reset of the portfolio. You want to keep that relatively short or at least match to in terms of securities lending cash.
[00:05:10.540] You want to have that fairly close to the duration of your securities lending trades.
[00:05:17.040] To mitigate that, we keep a large portion of the portfolio in floating rate notes and
[00:05:21.880] then short duration fixed rate assets.
[00:05:24.280] Those are the three risks that we see and some ways that we mitigate those risks in
[00:05:28.640] our cash portfolios.
[00:05:29.980] Now to switch gears a little bit, we've seen a move towards technology and streamlining
[00:05:35.400] of processes in the market.
[00:05:36.960] How has technology changed the market and Oprah's approach to cash investment?
[00:05:42.180] Has it streamlined the process in any way?
[00:05:44.860] Has it made the market more competitive, perhaps increased the risks in the market?
[00:05:48.960] That's a good question.
[00:05:50.280] I think the flow of information today is, you could say, almost instantaneous with the
[00:05:56.840] things that we are able to get access to.
[00:05:59.660] Because of that, trading occurs very quickly as well.
[00:06:03.120] So we have found in our portfolios that it's become very difficult to trade in the assets that we like unless we're very quick to the trigger.
[00:06:14.760] That's on CP platforms or with agency discount note platforms or really in a lot of areas, unless it's something that you're structuring yourself with a broker or an issuer.
[00:06:26.340] It behooves an institution to be very quick with what they're looking to buy with the advent of technology and its implications for trading in general.
[00:06:36.160] So how does OPR's collateral profile differ from other peers, maybe other public pension funders, just generally other peers in the market?
[00:06:45.760] I mentioned that our guidelines have been fairly constant, so we're not changing those.
[00:06:50.660] And I can't speak to what others do, but I think that's a bit of an anomaly.
[00:06:54.880] even during the financial crisis, we didn't change the guidelines. We just were more cognizant of the
[00:07:00.680] risks that we wanted to mitigate or to watch. And in terms of securities lending in particular,
[00:07:06.400] a lot of our peers, I think, are transitioning to more of a European model base where it's
[00:07:12.400] non-cash collateral and nothing wrong with that at all. That's a great model to use.
[00:07:17.380] We haven't seen the need to do that yet, at least in large measure, we do a little bit of it. And
[00:07:22.540] that's due to the fact that we're able to manage the portfolios of cash collateral that we have,
[00:07:28.020] and we do it in a risk-managed way while still returning a very competitive rate that, as of yet,
[00:07:34.740] we have not yet seen compensation for on the non-cash side. So that's the way I would say
[00:07:40.500] that our collateral profile might differ from others that might be in the market right now.
[00:07:45.000] Great. So speaking of differences, I'd like to briefly switch gears here and get MJ's perspective
[00:07:51.400] on how OPRS differs from traditional state funds like the treasurer state previously employed.
[00:07:57.400] Yeah, thanks, Greg. So one of my main focuses at the treasurer's office was overseeing our
[00:08:01.580] securities lending program. As Greg described, it was a more traditional program. So looking at the
[00:08:06.720] differences between a more traditional program and how we operate OPRS, the first difference I
[00:08:11.500] would highlight is the unique structure of OPRS. At the state treasurer's office, we were more
[00:08:16.440] passive in our approach. And by passive, I mean, we put in place the guidelines, we monitor the
[00:08:21.020] program, and we oversell the program, but we weren't involved in the day-to-day transaction
[00:08:25.160] that go along with a second lending program. Whereas at OPRS, we actually manage those
[00:08:29.720] transactions. We do all that in the house. So for instance, we are interacting with counterparties,
[00:08:34.780] we are managing the cash collateral portfolio. And I think that adds a unique aspect to OPRS
[00:08:40.380] program because it gives us an advantage when it comes to flexibility and communication.
[00:08:44.780] So on the flexibility side, we're able to communicate with portfolio managers and take on some trades that other securities lending program participants might not be able to take on because they don't have the lines of communication between their agent, the agent's trader, and the principal.
[00:09:02.400] So the second difference I would highlight is the collateral profile and just the scale of assets.
[00:09:08.140] At Opers, we're one of the largest pension funds in the country, and we hold many different types of assets.
[00:09:12.780] At a state treasurer's office, the scale wasn't nearly as great as OPRS, and the collateral was much more vanilla.
[00:09:19.640] We were holding mostly U.S. treasuries and corporate bonds, so that also limits some of our opportunities.
[00:09:24.840] And then the third difference I would highlight is the headline risk associated with the political office.
[00:09:29.080] Although OPRS is a public-private institution, we're very concerned with optics.
[00:09:33.900] At a state treasurer's office, you have working for an elected official, and that leads to a different set of concerns when you're taking on certain risks.
[00:09:41.680] So, for instance, we were very concerned with any fraud cases, any institution that was engaged in money laundering.
[00:09:48.300] So we had to be much more cognizant of institutions and the counterparties we were facing.
[00:09:54.390] Well, that's all the questions from my end.
[00:09:56.810] I'd like to thank both of you for taking time out of your day to meet with me again and record this podcast for the Global Peer Finance Association.
[00:10:04.810] Thank you for everybody who listened and until next time.