In the years that followed the global financial crisis, a certain set of allocators started to shun active management in favor of the easy gains of bull market index funds.
Not Susan Ridlen.
The longtime Eli Lilly and Co. chief investment officer has remained a firm believer in active management — and as the market has taken a turn for the worse, the actively managed strategies that dominate Lilly’s portfolio have fared better than their passive counterparts.
“She’s been an advocate for active investing at a time when some people were giving up on it,” says Howard Marks, co-founder of Oaktree Capital Management.
It’s working: In 2022, when markets plummeted, Lilly’s $3.4 billion hedge fund allocation delivered a net 13.2 percent return after fees. Over the past 14 years, the allocation has had an average equity beta of 0.15.
Ridlen’s decision to stick with hedge funds through a tough period is just one example of the dedication and commitment that have earned her Institutional Investor’s Lifetime Achievement Award. Ridlen is in it for the long haul, whether that’s her lengthy tenure at Lilly — 31 years — or her relationships with managers and industry friends.
“In an industry that suffers from short-termism, Susan is precisely the opposite,” says Leda Braga, CEO at Systematic Investments, one of Lilly’s investment managers. “Everything that she does in her life, she’s long term, steady, calm.”
So it may come as a surprise that becoming a CIO was never part of Ridlen’s original plan.
She was hired to work in the company’s corporate finance division and ended up rotating through various roles, including corporate treasury director of strategy and planning, CFO of the endocrine business unit, global treasury director in Belgium, and CFO of manufacturing.
Then in 2005, Tom Grein — Lilly’s treasurer at the time — tapped Ridlen to run the company’s pension fund. Ridlen had accounting and capital markets experience but had never managed an investment portfolio. She was excited to take on the challenge.
“I wanted to completely own something,” Ridlen recalls. “I wanted to figure it out and learn it myself, and then to have an opinion about how things needed to be run.”
She spent her first year in the new post learning as much as she could about investment management. She interviewed dozens of managers to learn how they thought about markets, how other allocators were investing, and what she might be missing in her own investment process. To this day, Lilly’s investment managers point out Ridlen’s desire to learn as something that sets her apart from fellow allocators.
“Every time she comes to a meeting with you, she’ll say, ‘I want to learn what you’ve got to say,’” Braga says. “You expect her to teach you, and she says, ‘I really want to learn.’”
That desire to learn from others also applies to Ridlen’s fellow allocators.
“I probably wasn’t equipped in my first year to talk to peers because I was so clueless,” Ridlen jokes. “About two to three years into the role, I started to discover these peer networks, and that was fabulous. I learned I could pick up the phone with some of these people and they were ready to help me right away, and I was never accused of asking a stupid question.”
She joined the Committee on Investment of Employee Benefit Assets, or CIEBA, and later the Indian Wells Group, a consortium of about 20 corporate plan CIOs who meet annually to discuss their work. (She would eventually go on to serve as the investment committee chair for the CIEBA board from 2017 through 2022.)
By the time Ridlen began working with Braga in 2010, the Lilly CIO seemed like a seasoned pro. In fact, Braga was surprised to learn that Ridlen’s investment experience didn’t span the length of her career. “I started in the investment industry in 1993,” Braga says. “To me, she never struck me as less experienced than me. She always struck me as a peer, if not more experienced.”
Today, Ridlen has a knack for helping managers feel comfortable enough to share the sort of information she needs before making an investment decision. “You have to be humble,” Ridlen says, adding that the most effective way to do this is by asking managers to slow down during their conversations. When she asks managers to explain things for her in layman’s terms, she’s able to catch things that might otherwise be missed during the diligence process.
“We’ll say, ‘Tell us what we’re missing. Tell us why we’re being arrogant about this. Tell us what we need to watch out for to try to get better at what we do,’ and I think that’s really important,” Ridlen says.
Those who work with Ridlen say that during meetings with her managers, she is well prepared and asks smart questions that spark interesting conversations. “We don’t spend a lot of time on nuts and bolts. She jumps into the greater implications,” says Mercer partner Jay Love, who has worked with Lilly previously on short-term projects. “She’s a very good strategic thinker.”
Oaktree’s Marks describes Ridlen as warm, friendly, and open. Paul Tudor Jones, founder and CIO of Tudor Investment Corp., praises Ridlen’s thorough, thoughtful approach.
“Her knowledge and passion for investing are evident in everything she does,” Jones said via email. “Her investment approach is underpinned by uniquely keen insights and diverse perspectives, which I believe is key to what makes her an incredibly successful and admirable CIO.”
Lilly looks a bit different than its corporate pension peers. For one thing, the corporation is one of the few that still makes contributions to its defined benefit plan. This gives Ridlen and her team some room to allocate capital beyond the typical liability-driven investment strategy that peers use to manage ongoing distributions without contributions from their sponsors.
“We always call ourselves an endowment in disguise,” Ridlen says.
What she means is that roughly half of Lilly’s portfolio is allocated to alternative assets, including a 32 percent allocation to private markets and a roughly 35 percent allocation to hedge funds. Lilly has a small allocation to fixed income, then uses portable alpha to overlay derivatives on top of the portfolio, aiming to hedge out some of its risk.
These investments are run by Ridlen’s nine-person team, which includes three senior portfolio directors. Ridlen emphasizes that these senior portfolio directors — who cover public markets, derivatives, and private markets, respectively — really own their asset classes. She gives them leeway and trusts their decision making.
She also gives associate-level team members the opportunity to really participate in investment discussions. “I want them to ask a lot of questions, because when they go to managers, they sometimes are really quiet,” Ridlen says. “I want them to learn how to ask questions and how to push back with me and with the managing directors and to come into those external meetings going, ‘Why are we doing it this way?’ They may catch something I’m missing.”
Ridlen also encourages her team members to learn from their peers. Delta Air Lines CIO Jon Glidden — the 2022 Lifetime Achievement honoree — once flew his team up to Indianapolis to swap notes with Lilly’s investment staff.
Glidden had spent years tinkering with an investment model to try to solve the problems corporate pension funds face — and he was surprised to learn that Ridlen and her team had implemented a similar model at Lilly.
“We both trade a lot of derivatives, we both lever the plan, we both have a lot allocated to alternatives,” he says. “She has a bit more invested in liquid alternatives than I do. I use a bit more leverage than she does.”
Adds Glidden, “There is a way to outperform benchmarks. It’s not easy, and that’s okay. Alpha’s hard, and it should be. The way to do it is to break free of all these constraints and to look through pockets of the market, like hedge funds.”
For Ridlen, generating alpha means maintaining a robust hedge fund allocation in the portfolio. What it does not mean is taking directional rate or equity exposure. Instead, Lilly’s hedge fund portfolio is diversified across strategies including discretionary macro, trend, and momentum, along with two funds of funds that act as partners to the pension fund.
This approach to Lilly’s hedge fund book reflects Ridlen’s overall investment process, which relies on patience for payoff.
“As an investor, she is focused on the process, exemplifying all-too-rare discipline and patience, and sharing our belief in sticking with a strategy you believe in ― through the ups and occasional downs,” said Cliff Asness, AQR Capital Management co-founder, via email. “In working with her for almost 20 years, I can say that Susan doesn’t follow the pack nor yield to trends, fads, or popular opinion — qualities I appreciate in a client and admire in a person.”
Trend and momentum strategies, which make up a large portion of Lilly’s hedge fund portfolio, have what Ridlen calls a “smile payoff.” Like the mouth in a smiley face, the strategies are convex — when markets trend downward, they perform well.
The discretionary macro allocation is an area where, early on, Ridlen demonstrated her willingness to stick with managers for the long haul. It was a tough area of the market to invest in after the global financial crisis, and there was little opportunity in that space for a while, according to Ridlen. But as central banks start to diverge in the ways they handle inflation — and in the wake of deglobalization — there are more disconnects for macro funds to take advantage of.
Her fund-of-funds allocation was similarly contrarian. When funds of funds fell out of favor roughly eight years ago, Ridlen decided to dig in, treating her managers like true partners. “I said, ‘If I’m going to keep you, I need to be getting more out of my fee,’” she recalls.
The funds were amenable. One helped Ridlen’s team construct a hedge fund consolidation report that Ridlen calls a risk report. It aggregates all of her hedge fund exposures and helps her team understand the overall picture of the hedge fund allocation. The fund of funds sends Lilly a 35-page report each quarter to help Ridlen understand what’s “going on under the hood” of her hedge funds.
“One of her strengths is really using or maximizing the relationships she has to really benefit her constituency,” says Caroline Cooley, CIO at Crestline Summit, a multistrategy fund.
Lilly also uses funds of funds to access some of the most constrained managers that typically are closed off to investors. According to Ridlen, these funds offer Lilly opportunities that are available for only a short time. For instance, one found an investment that helped finance Covid-19 vaccine distributions. With the backstop of the federal government, the investment was low risk, but it was still able to return 8 percent or so.
“I want to tap into the best ideas out there in the world,” Ridlen says. “I don’t want to just do [things] the way [they] have been done in the past. I want to have my cake and eat it too.”
Over the past year and a half, as the financial markets and economic environment have shifted radically, Ridlen and her team have been reassessing the portfolio to better position for higher rates, inflation, and a struggling equity market.
One move has been to hedge interest rate risk, because they believe that rates could come back down in the future — something that could cost the plan money. Likewise, they have started to slow the use of derivative overlays.
“I think my appetite for how much overlay to run has been tempered because of what happened in the U.K., as well as just how extreme markets can be and the liquidity crunches we could have,” Ridlen says, referring to the U.K.’s liability-driven investment crisis last year.
Her appetite for risk in other areas of the portfolio is also tempering. Lilly has long been big on venture investing, but high-growth strategies are paying off less than they used to. Couple that with a better-funded pension plan, and Ridlen has good reason to shorten the duration of her private markets investments.
Enter private credit, an area where Lilly’s investment team is working to make new relationships and commitments. The goal is to figure out the strong players in the private credit market and then tap the right partner, which can also act as an adviser — a role like that of Lilly’s funds of funds. Eventually, allocations to niche private credit managers could come too.
“So there’s always work to do there,” Ridlen says. “We’re proud of what we’ve got, but we won’t ever rest on our laurels.”
