Money Management Letter Interview of Steve Charlton

October 25, 2010 / by NEPC

Steve Charlton, CFA, Director of Consulting Services, was recently interviewed by Money Management Letter for their Consultant Profile.   We have provided the interview below for your review. 

Consultant Profile


Steven F. Charlton, CFA, Director of Consulting Serivces

Steve Charlton, director of consulting services at Cambridge-based NEPC, is encouraging clients to diversify their investments and be more opportunistic as the debate on the direction of the markets continues. "We're a little worried about the overall outlook, and are appropriately pessimistic given the backdrop," he said. Among NEPC's concerns: whether the U.S. will face inflation or deflation, and whether its economy will falter relative to other economies. He thinks that clients should not only look for strengths in asset classes, but also try to take advantage of weak areas in the market. "We're saying be opportunistic in some cases and be defensive in many other cases," he said.

On areas of opportunity

Despite the uncertain economic outlook, Charlton does see options for investors. He recommends that pension plans continue their moves toward emerging markets­specifically equity and debt­ and ensure that the debt is owned in its local currency. "We think [emerging markets] are going to be the strongest parts of the world," he said, adding that investors should hold fewer stocks because of market uncertainty. He also recommends that investors keep an appropriate amount of bonds which depends on many factors such as a client's goals and funded status but not expect a high return. Inflation-hedging assets could offer opportunities in the future, he said. Although deflation could show up in the short term, he said, NEPC isn't convinced deflation is coming. Rather, it believes worldwide government stimulus continues to increase the chance for inflation.

In the domestic market, Charlton sees potential for returns in the alternatives area­specifically with hedge funds. "They offer a higher level of return potential, a lot more consistency in returns than stocks in general, and they're great diversifiers," he said. And when hedge funds do falter, or the strategy struggles, they still perform better than the stock market on average, he added.

Risk parity is another strategy NEPC is looking into. Retirement funds can either use the strategy for the entire plan--equalizing the risk from all of its asset classes by leveraging up lower-risk areas like fixed income--or they could use it for a portion of their portfolio by hiring a specific manager who offers the strategy. But as with all other strategies that use leverage, he advises caution: "It's important to understand how you use leverage. It can be a scary term and appropriately so, and it should be used to lower risk in the overall portfolio."

On asset managers

NEPC is a proponent of opening up mandates to be broader, Charlton said. "We spend a lot of time with managers developing products that fit with their strengths. We encourage managers to develop products that don't just fit into one box anymore," he said. He wants managers, regardless of size, to play to their strengths regardless of investment class or specificity of the mandate. "We want them to put their best foot forward," he asserted. He pointed to Boston-based Wellington Capital, GMO in Boston and PIMCO in Newport Beach, Calif., as good examples of this management style.

In recent years, performance has taken a backseat to other important considerations, such as management and investment process, in the way NEPC selects its managers. "If we have confidence in a manager, performance is proof but not necessarily a choosing point," he said, adding that he spends more time thinking about how managers with solid governance and good fees fit into the stable of a specific client.

One part of developing a well-rounded portfolio is the use of both active and passive managers, Charlton said. At some points, the passively managed investments will begin to look like a drag on a client's portfolio, but the same can happen with actively managed investments as well, depending on the market.

On the consulting business

Charlton says he's interested in whether there will be further consolidation in the consulting business, as many founders of consulting shops approach retirement. "At some point those people want to get liquidity," he said, "and a lot of people would come to the conclusion that the only way to get that liquidity is to sell to a larger firm." Because of this, he expects many of the small-to-medium consulting shops will either merge or sell to larger firms. NEPC has dealt with that problem by adding a partnership structure to the firm. It now has 26 partners. Charlton has experienced personally how to deal with the intergenerational transfer of ownership, ­his father, Dick Charlton, is NEPC's founder, chairman and CEO.


Charlton lives on the North Shore of Boston with his wife and three children. He started in the consulting business on the defined contribution side. He was the first defined contribution investment specialist at Putnam Investments after graduating from St. Lawrence University in New York. He moved to NEPC after Putnam because the firm had a growing defined contribution business without much structure, and he saw an opportunity to take on more responsibility.


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