A New Investment Chief Needs to Turn Around a Languishing Pension

Mike Malchenko has taken over as investment chief of the Santa Clara Valley Transit Authority (VTA), overseeing more than $3 billion in combined pension, other post-employment benefits (OPEB), cash, and spousal support pools. He joined from NEPC, where he had served as a consultant for years. The position had been empty for two years since Sean Bill vacated it in 2022 to become chief investment officer of private credit firm Prime Meridian Capital Management. According to Malchenko, the fund has languished during that period, with board actions requiring implementation beyond what its consultant could carry out, a condition he describes as "deferred maintenance."

Malchenko said it will take time to reposition the portfolio. "It's going to take a while to turn the ship around," he said. "When investments start to be realized, we can start to think about reconfiguring implementation and manager searches." In November, the board approved a new asset allocation that reduces public equities by six percent and moves that capital into tradeable credit; the fund had not acted on the change before Malchenko arrived.

Several legacy positions are slow to unwind. In 2022 the board approved redeeming from a real estate fund with a long redemption queue; the redemption request will now proceed under Malchenko, but the process is expected to take five years. In hedge funds, the VTA's mandate calls for absolute return strategies with low correlation to other asset classes and low volatility. One of two hedge fund managers "essentially contradicts" that objective, Malchenko said. The VTA submitted a redemption request nearly two years ago, but the manager imposed a 10-year gate, paying out 10 percent per year.

Implementation has also been complicated by the board's decision to hire Meketa to replace NEPC as investment consultant. "Another hiccup is the change in consultants," Malchenko said. "We are walking the tightrope between getting things done, decisions being made by the previous consultant, and the new consultant coming in." The board expects to approve a new asset allocation in the coming fiscal year, and Malchenko wants a larger allocation to alternatives. As of 2023, the VTA had 4 percent in private equity via a fund of funds invested in 2021, a vintage that Malchenko acknowledges presents performance challenges because it was made near the top of the market, though he is optimistic about a rebound. The fund also holds 5 percent in diversified real assets and 9 percent in private credit. "I'd like to see it grow, but we have other investment battles to fight before we do that," he said.

Under Bill, the VTA had modernized its allocation over ten years, adding private credit and absolute return hedge funds and making allocations to Bitcoin and Ethereum.