Tim McCusker – Advising Through a Crisis at NEPC (Capital Allocators, EP.135)

Episode Summary

Executive Summary: In this episode, Tim McCusker of NEPC explains how allocators are navigating the market shock and remote work environment. He argues that long-term valuations support adding risk in equities and credit, while short-term uncertainty favors rebalancing, liquidity management, and manager-led tactical moves. The discussion also covers client-by-client differences, distressed opportunities, virtual due diligence, and likely workflow changes after the crisis.

Main Topics: Long-term opportunity vs. short-term uncertainty (Priority: 5/5): McCusker separates the attractive long-term case for equities and credit from the difficult near-term path, emphasizing that valuations and yields justify risk-taking over a decade but not necessarily month-to-month. Client responses across segments (Priority: 5/5): He outlines how healthcare, public funds, private clients, and corporate plans are reacting differently based on liquidity needs, governance, tax considerations, and liability-driven investing dynamics. Rebalancing as the key tactical tool (Priority: 4/5): Rather than market timing, clients are mainly using rebalancing to harvest gains and restore policy targets after the sharp selloff and rebound. Credit, distress, and private market opportunities (Priority: 5/5): NEPC is seeing substantial interest in credit, TALF-related ideas, distressed debt, and private market opportunities, with the expectation that activity will ramp as markets digest the shock. Remote due diligence and decision-making (Priority: 4/5): The team adapted its manager evaluation process for virtual on-sites, adding structured video meetings and enhanced operational due diligence to preserve quality. Behavioral and workflow changes from remote work (Priority: 3/5): McCusker notes smoother-than-expected internal adaptation to working from home and increased use of video, while expecting many travel and relationship practices to eventually revert. ESG-like scrutiny of manager behavior and SBA loans (Priority: 3/5): He flags potential reputational concerns for managers using SBA loan programs when they are large, well-capitalized firms that may not need the assistance.

Key Arguments: Long-term expected returns still justify risk-taking in equities and credit, because equity assumptions in the 6%-7%+ range versus Treasuries near 0.6% create a strong equity risk premium. Short-term market direction is too uncertain to call tactically, so rebalancing is a better allocator action than trying to time equities versus fixed income. Different client types face very different constraints: healthcare clients prioritize liquidity, public funds continue rebalancing, corporates benefited from LDI gains, and private clients must weigh denominator effects and tax losses. Credit and distressed strategies should become more attractive as the crisis unfolds, but there is time to evaluate them carefully rather than rush. Virtual diligence can work, but it must be standardized and include multiple team members plus stronger operational checks to partly replace on-site observation. The pandemic may speed some video adoption, but in-person travel and manager/client meetings will likely remain important and resume strongly once conditions normalize. Using government support programs like SBA loans may be defensible for some managers, but could be viewed negatively for established firms that do not truly need it.

Data Points: NEPC client base: 350 clients - Tim McCusker describes NEPC's scale. Total assets served: over $1.2 trillion - NEPC's assets under advisement. Shift to remote work: March 12 - McCusker says the firm moved to full work-from-home on this date. Equity return assumption: 6% to 7%+ - NEPC's long-term capital market assumptions for equities. Emerging markets equity assumption: higher than 7% - McCusker notes EM assumptions are even more attractive than developed markets. Treasury assumption: 0.6% - Long-term assumption for Treasuries, roughly matching current yield. Expected lower capital calls: at least one-third less - NEPC's base case for reduced private equity capital calls in the near term. Historical decline in calls and distributions: down by a third to half - Observed during the global financial crisis, used as a reference point. Workforce footprint: eight offices - NEPC had historically relied on phone-based communication across offices.

Pivotal Quotes: "the big challenge that we're having in assessing this is how to separate the short-term tactical side of things with the long-term view" — Tim McCusker: He frames the central investment problem during the market shock. "If they had any treasury exposure because their liabilities didn't rise by that much because it's got a credit spread element to it" — Tim McCusker: Explaining why corporate plans with LDI benefited from falling rates. "We're going to go back to normal pretty quickly and we're going to be road warriors once again" — Tim McCusker: His view that travel and in-person relationship building will rebound after the crisis.

Implications: Allocators should focus on rebalancing, liquidity, and manager quality rather than tactical market calls. Credit and distressed opportunities may expand, but virtual diligence and reputational scrutiny of managers will matter more going forward.