Episode summary
Is this a bubble? CIO Matt Clark on investing for crashes, expensive markets & September volatility
Summary
Matt Clark says the South Dakota Investment Council is built around a simple goal: keep the state retirement system 100% funded so pensions and COLAs are protected. That objective pushes the portfolio toward a contrarian posture, adding risk only when markets are cheap and cutting exposure when valuations are extreme. He says the council is currently holding a lot of cash-like liquidity because, in its view, equities and other risky assets are at levels comparable to 1929 and 1999.
Clark argues that being early is the price of a contrarian strategy. He says the fund is willing to endure long stretches of underperformance, like in the late 1990s, because the reward comes later when prices normalize. He points to the Global Financial Crisis and the COVID selloff as examples of sticking to predetermined valuation thresholds, buying aggressively only after markets become cheap enough. He also says the council prefers liquid T-bills now, while selectively looking at areas that have lagged, such as real estate, international equities, and some energy exposure.
For allocators, his main advice is to understand the board’s tolerance for pain before taking active risk. He says the biggest mistake is departing from a benchmark without real buy-in, because a strategy can fail politically even if it is sound intellectually. The key is to match the benchmark, the time horizon, and the amount of drawdown a plan can truly withstand.
Key takeaways
- Matt Clark says the South Dakota Investment Council targets 100% funding because pension security matters more than chasing incremental return.
- Clark says his team is at minimum risk because its valuation work sees today’s market as one of only three extreme overvaluation episodes, alongside 1929 and 1999.
- He says the fund prefers T-bills for liquidity and wants cash that can be deployed the same day of a crash, not trapped in illiquid vehicles.
- Clark argues that contrarian investing requires accepting years of underperformance first, because the reward comes only after prices mean-revert.
- He says allocators should choose a benchmark and strategy based on the pain their board can actually endure, not on abstract long-term theory.
Notable quotes
“we came to believe that you know instead of kind of the standard be 80% funded or or fix it uh we thought well the right answer is 100% funded”
“When the markets are really high like they are today, uh then then the risk of of a large decline is elevated”
“there really isn't anything cheaper and so unusually then the answer is is to just go to a lot of cash”
“there's really only three times uh in history that have been as expensive uh this expensive uh 1929 and 1999 and now”
“I want it that day, the day of the crash”
How the episode opens
I'm Christine Jordano at our national institutional retreat with CIO Matt Clark. What's the name of your fund? — Uh South Dakota Investment Council. We manage the assets for the South Dakota Retirement System and the state's trust funds. So Matt has been called by other CIOS as having one of the most elegant and simple portfolios in the industry. We're going to go into how he does that. Matt, how funded are you?
Uh 100% and um over time we we came to believe that you know instead of kind of the standard be 80% funded or or fix it uh we thought well the right answer is 100% funded. You know, we always use the analogy, well, you wouldn't be happy with 80% chance the bridge would collapse or an 80% chance that the plane would land. You want 100% or as close to that as you can.
And and a pension's important, too. And so, we should be 100% funded so that we we have the money in hand combined with, you know, the future expected contributions and returns that that will fully pay all the pensions. We shouldn't have to chance for some windfall down the road to help us be okay.
And so a few years ago, uh, that expectation was codified and and so if we're not 100% funded, the COLA automatically adjusts to help us maintain the 100% funding. And if that is not sufficient, then we have to propose other benefit changes. So a lot of our investment approach is geared around trying to avoid having to cut benefits outright, which would be very painful for our beneficiaries.
At the same time, we want to earn as high returns as we can over the long haul. uh so we can afford to pay as big a colas as possible as the financial markets will allow but without taking too much risk uh especially when the markets are really high and of having to cut those benefits.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- september volatility
- bubble risk
- contrarian investing
- pension fund funding
- holding cash
Companies and tickers mentioned
- South Dakota Investment Council
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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