The article below is from our BRIEFINGS newsletter of 11 November 2021
At a recent Goldman Sachs Asset Management Forum, Katie Koch, co-head of Goldman Sachs' Fundamental Equity business, spoke with Robin Diamonte, chief investment officer of Raytheon Technologies, about her career, changes in the retirement landscape and what it’s like to manage one of the largest corporate pension plans in the U.S. with more than $100 billion in assets.
What follows are excerpts from their conversation.
Katie Koch: You’re widely known for being on the cutting edge of innovation in terms of driving better outcomes for individual investors. For example, you were early to add risk parity, alpha overlays and hedge fund strategies to pension plans. What drives you to be innovative?
Robin Diamonte: Some of it had to do with my mentor, Britt Harris (currently CEO and CIO of UTIMCO) with whom I worked closely with at Verizon. Britt was always looking for the next thing and inspired me to do so as well. In our world, you need to be innovative and look for the next source of alpha because every great idea eventually gets arbitrage by the market—and then the returns aren’t there anymore.
Katie Koch: One of your innovative ideas was to add risk parity strategies to your investments. How do you think these strategies have held up?
Robin Diamonte: Risk parity strategies are doing exactly what they were designed to do. If cash isn’t the best performing asset class and there are no significant valuation issues, then risk parity will provide better risk-adjusted results than a 60% stocks/40% bonds portfolio over the long term. I think some people may have been disappointed with risk parity returns because they expected the strategy to outperform equity, private equity and private debt. Risk parity strategies are one component our multi-asset class investment allocation, which makes up 10% to 15% percent of the portfolio.
Katie Koch: And what are some of the emerging investment areas that you're excited about?
Robin Diamonte: This year, we created an opportunistic bucket where we invest “flexible capital” of up to $2 billion. In the past, we sometimes passed on opportunities because there was no clean bucket to put it in. So we carved out an allocation that will be measured on a longer-term basis. The return target is to outperform our long-term expected return on assets by a couple of percentage points. So we're looking at opportunities such as digital technology, private debt, frontier emerging markets, as well investment themes that are tied to potentially large future trends.
Katie Koch: Let’s pivot to your thoughts on the retirement plan landscape. The industry has largely phased out traditional defined benefit pensions in favor of defined contribution plans. That’s forced individual investors to make their own investment decisions with their retirement savings, often leading to suboptimal outcomes. But you’ve helped make DC plans more like traditional pension plans. Can you expand on that?
Robin Diamonte: I think DB plans are a better retirement strategy than DC plans over the long term given the professional management and mortality pooling. But DB plans were created when companies had to pay out benefits for only five to 10 years after retirement, not 20 to 40 years. In the mid-2000s, we saw a lot of companies and our peers close their DB plans and shift employee retirement to DC plans. After the financial crisis we started looking at how we could provide guaranteed lifetime income to our employees in the DC plan. So today, when someone joins the company’s DC plan, the default investment option is a low-cost passively managed target date fund that eventually turns into a guaranteed lifetime portfolio. When participants reach age 48, their assets begin a glide path, or phase-in, of the secure income annuitized portfolio, making incremental annuity purchases that end at age 60, when the portfolio is fully guaranteed. The portfolio maintains a growth orientation so that the annually guaranteed income can increase even in retirement. The strategy provides both controls, since the employee always has access to their plan balance but also has security with guaranteed lifetime income.
Katie Koch: Goldman Sachs recently announced the acquisition of a European asset manager called NN Investment Partners. As we work through our own integration of the two companies, we would love to hear your thoughts about the merger of Raytheon and United Technologies, which closed in 2020. You were the CIO of United Technologies at the time and were responsible for integrating the companies’ pension plans. How has that integration gone and is there any advice you can share on best practices?
Robin Diamonte: I think the advice on merging is to start as early as you can before the transaction closes. Something that Britt Harris told me years ago was to honor the past. Really understand the people and the past organization: what policies and practices do they have; what things are done differently and why; and then have an open mind about the integration and implement the best practices of each firm.
Katie Koch: A key part of our culture as investors is to be humble and foster a growth mindset. So we love to ask very successful people about their own mistakes and what they’ve learned from them. Can you give us an example of something that perhaps didn't go the way you wanted it to and what you learned from it?
Robin Diamonte: I've been at this for a long time, so I’ve made a lot of mistakes. But I would say that not rebalancing to your strategic policies is one that comes to mind. I tell people all the time, you cannot time the markets. The tech bubble, the global financial crisis and the pandemic, for example, all felt like unique investing periods at the time. We always rebalanced to our strategic asset allocation during each of those times but at a cautious pace. I think that if we had rebalanced a little faster, we would have been slightly more successful. It's just like de-risking a portfolio. When your funded status and interest rates are going up, you want to ride it out rather than de-risk and take returns off the table. It’s all psychological and you need to stick to your strategy even if it seems painful.
Katie Koch: Robin, you’ve been very open about your sexual orientation and ahead of other leaders in our industry. How did you make the decision to come out when you did and how has doing so impacted your career?
Robin Diamonte: What you have to do is to trust your instincts. I remember in the old days I wouldn't come out to people until I felt like they knew me and my work ethic. But then at some point in my career, something clicked and I realized I was spending so much energy—at work and in my private life—not being my authentic self and not bringing my true self to work. Trying to pretend to be someone who you're not wastes so much energy that you could be using more productively and inhibits you from building friendships and close relationships with your peers and your coworkers. It impacts your mental health and your effectiveness at your job. I think being openly gay in some respects, also helps to educate people and normalizes our differences. Luckily, I don’t think it affected my career. People just accepted me for who I was because I didn’t define myself that way. If I had a list of 10 qualities that I thought defined me, being a lesbian wouldn’t be one of those 10 things. If a person feels comfortable in their own body and proud of who they are, then it’s so much easier to come out and for people to accept it.