Illinois-based pension funds, both public and corporate, have stepped up the hiring of emerging managers, especially minority- and women-owned firms.
Pension funds in the state — including those of Boeing Co., Chicago Public School Teachers Pension and Retirement Fund, Chicago Laborers' Annuity and Benefit Fund, Illinois State Universities Retirement System, and Illinois State Board of Investment — have assigned some $1.6 billion to such firms this year.
In addition, all of the major state and Chicago public funds that have not yet hired emerging firms are at least looking at doing so, especially minority- and women-owned firms, because of pressure from state legislators. The state's only statute on the issue requires public funds to report on their use of minority- and women-owned firms.
Those that already employ minority managers are hiring more. Plus, they have programs to use minority- and women-owned brokerage firms for some trading.
As part of its efforts to make its searching and hiring more inclusive, the Illinois State Board of Investment plans to create a database of minority- and women-owned firms and recently added a staffer to oversee the project.
All of these moves have made Illinois a mecca for minority and women-owned money management firms seeking to grow. They should be emulated by corporate and public pension funds across the nation.
Two decades after the first serious effort to spark the hiring of firms headed by women and minorities, only limited progress has been made. The top 25 such firms manage only 2.7% of the assets of the 1,000 largest pension plans, up from 1.8% a decade ago.
Almost 40% of that 2.7% is managed by two women-owned firms — Payden & Rygel and Seix Investment Advisors Inc.— meaning the share managed by black, Hispanic or other minority firms is tiny.
Such firms often have difficulty gaining pension accounts because the firms are too new to have the preferred, and often required, five-year track records, and/or have too little money under management to be viable candidates.
Often they are caught in a Catch-22. They can't get pension clients because they don't have enough assets to satisfy search criteria, but they can't get enough assets until they get clients.
Pension funds, as well as endowments and foundations, must change their typical models for selecting managers so that searches can be as inclusive as it possible.
The Illinois State Board, in creating its database, is trying to make up for a deficiency in the consultant community in general.
In addition, James A. Bell, Boeing chief financial officer, in a recent speech at a Rainbow Push Coalition conference, talked of developing a new approach to structuring the company's pension fund managers. "(R)etirement funds like ours have traditionally established large account structures, achieving economies of scale with respect to oversight and costs," he said. "This has made it more difficult for smaller investment firms to penetrate the retirement asset management and investment markets. But now Boeing and others are driving changes to that landscape. Today, developments in technology and Internet access have made it easier for small firms to have access to the same data as the big funds — transparency and access to information obviously levels the playing field."
There is a risk that the process of being more inclusive will become more politicized in a rush to quickly fund such mandates, and that must be guarded against. Pension sponsors must not lose sight of the ultimate goal of trying to achieve the best return for an appropriate level of risk at reasonable cost. It's not an easy task.
After all, for most pension plans, even big asset cushions of the 1990s proved not enough to withstand the devastating market of the last few years. And pension sponsors have no legal obligation to help finance new managers.
At the same time, it is in their interest to foster competition as best they can, and to find the best investment talent they can. And investment talent is not restricted to white men.
Minority managers seek only better opportunity. None has ever asked for special treatment in terms of fees or performance benchmarks. All emphasize their desire to be judged on performance, like any other manager.
Who knows, some fund may discover the next John Rogers, Gene Sit, Eddie Brown or Lou Holland.