This ex-mechanic Marine turned finance chief oversees investment of $70 billion for Pa. teachers

It’s a big job, managing the people’s money. Minding $70 billion for the public-school pension system PSERS, Benjamin Cotton is Pennsylvania’s highest-paid state employee, collecting $525,000 in first-year salary and bonus as chief investment officer.

The more profit Cotton, his 63 staff, plus outside managers and advisers can squeeze from those invested funds, the less state and local taxpayers will eventually need to pay pensions for half a million school employees.

He’s come a long way since his days as a corporal in the Marines, fixing engines on armor-plated bulldozers plowing up minefields in the 1991 Gulf War.

Cotton took his first finance courses at the U.S. base in Okinawa, Japan. He has published articles on statistical analyses of investment returns, and last year he added a Ph.D. in education from Vanderbilt University. He was a bond analyst, headed a trading desk at Ford Motor Co., and took charge of investments for the United Auto Workers’ health plan.

Last winter Cotton was picked by PSERS’s sometimes-fractious trustees, including unionized teachers, school board representatives, and public officials of both parties, to boost the investment portfolio, whose returns last year ranked in the bottom 1% of large U.S. plans.

PSERS — the Pennsylvania Public School Employees’ Retirement System — also trailed the average for large plans over the past 10 years because it decided against investing much in surging U.S. stocks, focusing instead on private assets.

Cotton sat for questions at a diner near his Lancaster home. Here are highlights, edited for length and clarity.

Ford has a very strong auditing culture. Internal controls underlay everything they do. They put me in charge of international credit audits. When you know all about your assets and your spending, you can make changes and not be surprised. You can lose a lot with weak financial controls.

At PSERS, we have a lot of blocking and tackling to get our controls to what I am used to.

In my work for Ford, I met Ron Gettelfinger, who became president of the UAW (2002-2010). He was a rock star — good negotiator, good with people. He was already working out a deal to fund the large health-care liability when the [2008] financial crisis hit.

The auto companies gave the plan IOUs (including General Motors stock) and gave them the opportunity to reorganize the plans. It was imperative; liabilities were growing fast.

They advertised for a chief investment officer. My grandfather had been a Baptist minister in Detroit. His church was all hourly autoworkers. I thought I could do this. So I applied.

There was a little indigestion. And at first, no one thought it would work. We were really fortunate the markets moved our way after 2009. And they brought in some very experienced health-plan managers.

Better returns, better expense control, we turned it around. When we started, we had needed 9% [annual investment returns] to keep it funded. By the time I left, they only needed 5%. The last I checked it was 3.5%. At that point, you can pull back and invest more conservatively, especially with bond yields going up.

We attract some great professionals. They want to serve. They may not want to work 80 hours a week at Goldman Sachs. They know they can work 65 hours in Harrisburg and still make a difference.

Investment professional are no more special than anyone else. Humility is very important in this role. The most important thing is to keep our eyes open. That’s when situations come along that we can take advantage of.

The board made a decision before I came on board to take the private and [hedge fund] allocations down. We had been over 50% in those assets. We are closer to 30% now.

I’m very much skeptical about private assets. You should earn a premium for locking your money into non-traded assets, but the private-fund managers know that, and they try to price so they get the benefit. They make you think you have to be part of that whole private-equity game. They create scarcity for their own funds, so everyone wants more.

I say no. We don’t have to put another $800 million into private markets, not to “pace” our investments.

At the same time, you want access to private investments; that’s most of the economy. But no one is entitled to higher returns just because you buy some. I think the reduction the board has asked for right-sizes our investment.

I’m skeptical of a lot of measurements. The analysis that has been used can oversimplify risks and artificially exaggerate likely returns. I hope we develop a better way of looking at private markets.

They do put a lot of information out. But it’s difficult to understand what a lot of the information means. It’s not like the team was trying to hide things. Sometimes staff will tell me people “just don’t get it.” I say, “No, you’re not explaining it right.”

The returns would not be high enough. We would be trading one kind of risk for another. Right now the old classic portfolio of 60% stocks / 40% bonds doesn’t take us where we want to go.

Before, the trend was toward globalization. As a result, a number of investment strategies over-allocated to China. The argument being investors would benefit as every nation joined the mainstream world economy.

That has turned on its head. Now there’s a move toward what [U.S. Treasury Secretary] Janet Yellen called “nearshoring” of factory production, closer to home.

I was not a big fan of [heavy foreign investment] once you take into account many nations’ lack of transparency or basic investor rights. But at PSERS, there was a significant investment in those emerging markets. Over the long run, it has been very expensive. The board has asked me to reverse this. Soon we will no longer be overweight in that region.

You should see a move toward more transparency. But I’d defer to our chief counsel on disclosure. And our private investment managers are sometimes uncomfortable with our level of disclosure as it is.

I think they would still do business with us.