Apr 5, 2021 · 55m · capital-allocators
Dominic Garcia – Risk-based Investing at New Mexico PERA (Capital Allocators, EP.187)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Dominic Garcia, Chief Investment Officer of New Mexico PERA, joins Ted Seides to explain how modern institutional risk budgeting, alpha-beta separation, synthetic overlays, and structural pension governance reforms drive sustainable returns for public plan beneficiaries.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 20.9% of the talking time here. How this is scored →
Ted as informed peer 4.0 Guest teaching 4.5 Guest disagreement 0.4 Ted pushing back 0.8
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 44:00 Rejecting conventional private equity metrics
Dominic forcefully dismisses the industry-standard reliance on IRR and TVPI, arguing that 8-10% of a 12% IRR is merely commoditized beta bought at exorbitant fees.
Hardest push from Ted ▶ 29:11 Ted questions beta contamination in alpha bucketsTed directly challenges Dominic's framework by pointing out that long-only and private asset buckets carry substantial embedded macroeconomic beta, forcing Dominic to defend his overlay mechanics.
Biggest teaching moment ▶ 44:00 Deconstructing private equity returns via direct alphaDominic educates the audience on why allocators must evaluate private markets using public market equivalents (PMEs) and idiosyncratic excess value rather than misleading headline IRRs.
Ted holds their own ▶ 22:09 Ted interrogates the 7.25% actuarial hurdle mathTed pinpoints the mathematical dilemma confronting allocators, directly questioning how a fund can achieve a 7.25% return target in a zero-interest-rate environment.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Dominic Garcia's Early Career and Journey to SWIB | 3 | 3 | 0 | 0 | Ted prompts Dominic with an open-ended question about his origin story. Dominic narrates his transition from public policy school to the New Mexico legislature and his early mentorship with David Villa. | |
| Modernizing NM PERA: Moving to the Prudent Investor Act | 4 | 5 | 0 | 0 | Dominic explains the historical transition from rigid legal investment lists to the Prudent Investor Act, followed by the institutional culture and risk management laboratory at SWIB. | |
| Public Pension Governance and Talent Compensation Dynamics | 5 | 5 | 0 | 2 | Ted drills down into the practical mechanics of compensation and governance restrictions in public pensions. Dominic highlights the bifurcation between independent systems like SWIB and legislature-controlled systems like NM PERA. | |
| Framework for Risk Budgeting and Alpha-Beta Separation | 4 | 6 | 0 | 0 | Dominic delivers a structured masterclass on decomposing a total fund risk budget into macro factor betas (growth, inflation, rates) versus independent tracking error alpha streams. | |
| Actuarial Hurdles, Embedded Leverage, and Variable COLA Reform | 6 | 6 | 1 | 2 | Ted presses on the realism of achieving a 7.25% actuarial hurdle when cash yields zero. Dominic details NM PERA's use of modest embedded leverage and a landmark variable COLA reform. | |
| Constructing Alpha Streams Across Three Business Lines | 4 | 5 | 0 | 0 | Dominic outlines NM PERA's three core alpha business lines: high active-share long-only equities, market-neutral portable alpha hedge funds, and private asset direct alpha relative to PMEs. | |
| Managing Unwanted Exposures with Systematic Beta Overlays | 6 | 6 | 1 | 3 | Ted challenges Dominic on how embedded betas in long-only and private asset portfolios are actually neutralized. Dominic explains the mechanics of systematic derivative overlays. | |
| Sponsor Message: Ridgeline Investment Management Platform | 1 | 1 | 0 | 0 | Sponsor message for Ridgeline followed by a quick resumption of the interview dynamic. | |
| Manager Diligence, 14-Metric Scoring, and Governance Delegation | 4 | 5 | 0 | 0 | Dominic describes NM PERA's delegated investment governance where the board sets risk tolerance and staff manages execution using a 14-metric quantitative alpha scoring model. | |
| Evaluating Idiosyncratic Alpha, True Edge, and Private Market PMEs | 6 | 8 | 2 | 2 | Dominic delivers a sharp critique of conventional private equity evaluation, arguing that standard IRR metrics obscure public market beta, and advocates for strict PME direct alpha analysis. | |
| Market Outlook: Alpha Headwinds, Infrastructure, and Digital Assets | 5 | 6 | 1 | 1 | Ted inquires about evaluating emerging asset classes like cryptocurrencies within a public pension framework. Dominic highlights why lack of macroeconomic regime data makes unproven assets unsuitable. | |
| Closing Rapid-Fire Questions: Habits, Literature, and Life Philosophy | 2 | 1 | 0 | 0 | Ted leads Dominic through standard rapid-fire closing questions regarding personal routines, altitude running in Santa Fe, literature, and core values. | |
| Premium Member Segment: Implementation Timing and Early Life Regrets | 2 | 2 | 0 | 0 | In the premium segment, Dominic shares professional insights on strategy implementation timing risk alongside a childhood moral lesson. |
Statements from this episode (18)
Garcia: SWIB is a best-in-class public pension in the US and globally
“First of all, I think SWIB is a best-in-class public pension on a number of fronts here in the United States, and I think even globally.”
Garcia: Institutional investors are risk allocators first, not capital allocators
“And I think some of the best things that I learned was portfolio construction and understanding that we're not capital allocators. We're actually risk allocators first.”
Garcia: About Half of US Public Pensions Offer Incentive Pay
“When you look at the public pension plan landscape in the United States, I would say about half of the pensions have the ability to pay an incentive compensation for pensions. Most are still stuck on government focused pay bands, right?”
Garcia: New Mexico PERA is 100% externally managed
“So we actually end up being a hundred percent external.”
Garcia: PERA allocates 2% tracking error to target 1% excess return
“And then, so in alpha space, we'll say, you know what, in addition to the risk we're taking in asset allocation space or beta, we want to take up to another two percent tracking error relative to that beta that we're taking. And up to that additional two perce…”
Garcia: Separately optimizing alpha and beta risk budgets improves total plan risk-return
“And so when you separate those two things, optimize them individually, and bring them back together, what ends up happening is your alpha book tends to be quite low correlated to your beta book. And so the total risk it generates is quite low. So what you're g…”
Garcia: PERA targets 7.25% return using 10% beta leverage and 1% alpha
“What we're looking at is in our beta book, we're looking to incorporate embedded leverage in the asset classes and then about in a very modest amount, which is about 10% at the total asset allocation level. So we think we can get somewhere around a six percent…”
Garcia: Private assets are active management vehicles, not distinct asset classes
“We view private assets as not asset classes. We view the private assets as another way to access active management or alpha.”
Garcia: Hedge funds are pound-for-pound the best risk-adjusted alpha generators
“We're buying market neutral hedge funds because on a risk adjusted basis, hedge funds are still pound for pound the best alpha generators.”
Garcia: Private equity exhibits about 10% tracking error to MSCI World
“And so private equity in general is going to have something around 10% tracking error to MSCI world over time.”
Garcia: Private asset tracking error against public benchmarks catches up over 3-5 years
“The tracking error that we're generating from our private assets, a good chunk of that is really this lagged effect relative to our public market equivalents. It catches up over a three-year rolling, a five-year rolling period, but that's really where the slip…”
PERA delegates all manager selection to internal staff while board sets risk
“So what our governance looks like today is our board makes three decisions. They set our overall risk tolerance, they approve our risk budget as what I've been talking about, and they set benchmarks. Everything else gets delegated down to staff. So the manager…”
PERA targets capturing 60% to 70% of managers' gross alpha
“So based on the gross alpha that a manager can generate, we're trying to get to 60 to 70% capture ratio of that gross.”
Garcia: Private equity will institutionalize via quantitative analysis like hedge funds did
“I think private equity is where hedge funds were like a decade ago or so, right? It's a very more networking type industry. You kind of sign up. I think private equity and the private asset classes are going to institutionalize and mature going forward. I thin…”
Garcia: Private equity should be evaluated for PME spread, not headline IRR
“The reason why you buy private equity isn't for the total return, in my view, it's the relative return to your PME, because a private equity portfolio or private equity management, let me just give you an example. Let's say they generate a 12% IR. Well, if you…”
Garcia: Investors Will Use Infrastructure to Replace Fixed Income Allocations
“Given low returns on, on bonds and cash, I could see investors using infrastructure as a replacement somewhat for that, and I think infrastructure is going to be a very interesting place to be in the United States, just from a public good point of view.”