The $10.2 billion Chicago Public School Teachers' Pension and Retirement Fund already employed Mercer Investment Consulting Inc. as its longtime consultant when it picked three others to help trustees choose some equity managers.
Each of the three new firms was hired to advise the trustees on $100 million in assets, while Mercer will continue to give advice — including on asset allocation — affecting the entire fund.
Each of the new firms will cost the fund about $700,000 in fees annually, or from about 0.65% to 0.75% of the assets under their oversight, depending on the firm. Final terms, including fees, are subject to negotiations. Mercer, by comparison, receives about $250,000 a year for its work on the entire fund.
In an effort to boost its use of minority firms, the fund hired Attucks Asset Management LLC, Chicago; Northern Trust Global Investments, Chicago; and Progress Investment Management Co., San Francisco. The three firms don't call themselves consultants, but rather managers of managers. More precisely, the three firms specialize in putting together funds of emerging managers, including minority- and women-owned firms.
The problem is, the trustees rushed to act, paying high fees for redundant services. The fund already employs a number of minority-owned firms, all hired directly without the use of managers of managers. Why didn't fund officials continue to rely on Mercer, which has an emerging manager database, to recommend such managers? The process would have taken longer than a day. But what's a few months?
The reason for the rush to hire is the Chicago Teachers' trustees, like those of the other major public employee pension systems in the state, have been under pressure from Illinois legislators for the past year to use more minority-owned managers and minority-owned brokerage firms.
The Chicago Teachers' trustees went into their April meeting planning to assign $100 million to a manager of emerging managers, as part of a plan to quickly hire a number of minority-owned firms. They wound up, with little discussion, assigning a total of $300 million to the firms.
Mercer presented six candidates for the trustees to consider; it didn't make a recommendation on any of them. Besides the ultimate winners, the others were FIS Funds Management Inc., Philadelphia; Benchmark Advisory Services Inc., Ocean Ridge, Fla., and United Investment Managers, Atlanta, which is affiliated with Gray & Co. Institutional Investment Consulting.
Why Mercer included Benchmark is a puzzle. Edward A.H. Siedle, the owner, who has done keen work on investigating money management abuses at pension funds, has no experience in manager-of-managers programs. But also the inclusion of UIM and Attucks is perplexing for such a large assignment. UIM has only $33 million in assets under such a strategy. Attucks has no assets under management in the strategy, although it does manage $57 million in other investments. With little if any discussion of the risk of assigning so much money, the Chicago Teachers trustees' award will about triple the Attucks' assets under management.
Each of the three winning firms estimated it will keep about half of the fees the fund pay, distributing the rest among the managers selected for their programs. Even officials of some of the firms mentioned the cost of such services would be higher than if the fund hired the managers directly.
A key question is how good these three firms will be at picking superior-performing active domestic equity minority managers. The Chicago fund might pay a high price to find out.