Emerging managers enjoying a renaissance

Public pension funds are making a renewed push to hire emerging managers as pension executives look for new talent in their never-ending quest for alpha.

“We're looking for quality, not quantity,” said New Mexico State Treasurer James Lewis, an ex-officio member of the $8.5 billion Educational Retirement Board and the $10.6 billion Public Employees Retirement Association of New Mexico.

“Let's give them (emerging managers) an opportunity to see if they can compete with the bigger firms instead of arbitrarily ruling them out.”

Mr. Lewis was one of 350 officials, plans sponsors, money managers and consultants, attending the annual Plan Sponsor and Minority Manager Consortium in New York City last week.

While neither the conference nor the concept of emerging managers is new, interest from Mr. Lewis and his peers could spark new emerging managers programs. Neither of the state plans he represents has such a program.

The fresh push for emerging managers is being driven in many cases by an assessment of the performance of more established, larger money managers during the financial crisis.

Like many pension funds, New Mexico's public plans have sustained heavy investment losses. The public employee plan, for example, saw assets drop by more than 30% in 2008. Mr. Lewis said the reassessment of what happened includes determining which firms are the most capable.

“We don't want to put up some artificial barriers and lock smaller managers out,” he said.

State lawmakers across the U.S. have also been pushing the issue, using the financial crisis as an opportunity to force the hiring of more money management firms owned by women, members of minorities or people with disabilities.

This year, both the New York and California legislatures have been debating bills calling for greater diversity in the hiring of money managers. Last year, the Illinois Legislature for the first time defined managers with assets of $10 million to $10 billion as emerging managers, as long as they were owned by women, minorities or disabled persons. The more traditional definition of an emerging money manager is simply a firm with less than $2 billion in assets under management.

In addition, the Texas Legislature last year and Maryland lawmakers in 2008 passed bills calling for greater emphasis among pension plans in hiring women and minority money managers.

A bill introduced in the New York Senate would require the $129.4 billion New York State Common Retirement Fund to invest at least 15% of its externally managed assets with emerging firms owned by women and minorities. The bill was referred to the Finance Committee, which has yet to vote on it.

In California, an Assembly bill approved late last month would have required that at least 10% of investments made by the $200.3 billion California Public Employees' Retirement System and the $138 billion California State Teachers' Retirement System be given to women and minority-owned firms with assets of between $10 million and $1 billion.

The bill, however, is being revised in the state Senate to omit the 10% requirement.

Mark Higgins, legislative aide for the bill's sponsor, Assemblyman Michael Davis, said the bill will require the two pension systems to report the ethnicity and gender of emerging managers being hired as part of an effort to move the plans to increase diversity.

The changes in Illinois require pension plans advertising for emerging managers to define in their requests for proposals just who can apply for the mandates.

Two recent RFPs — one from the $9.5 billion Chicago Public School Teachers' Pension and Retirement Fund and one from the $21.9 billion Illinois Municipal Retirement Fund, Oak Brook — noted that eligible managers must have less than $10 billion in total assets under management and be certified under Illinois statute as a minority, women- or disabled-owned business enterprise.

Executives at public funds in Illinois seemed to welcome the change.

“Ninety percent of our portfolio is controlled by white, middle-aged people like me,” said William R. Atwood, executive director of the $10.4 billion Illinois State Board of Investment, Chicago. “We have been missing a sizable pool of talent.”

Plan sponsors are also working together to attract emerging managers.

Three Illinois funds — Chicago Teachers, the Illinois Municipal fund and the $14 billion State Universities Retirement System of Illinois — formed a consortium to invest in emerging real estate managers.

So far, the group has committed $190 million through Franklin Templeton Investments which is setting up a real estate fund of funds.

Kevin Huber, executive director of the Chicago Teachers pension fund, said the fund of funds is expected to have $250 million to $300 million when it closes. The closing date has not been determined.

“The advantage of a consortium is that it allows vast amount of capital to be spread quickly among emerging managers and provides a one-stop place for emerging managers to access institutional capital, as opposed to trying to market to many different institutions,” he said.

The real estate project follows a 2006 agreement between the three funds for a $240 million joint investment in private equity managed by emerging managers.

In Texas, T. Britton Harris IV, chief investment officer for the $98 billion Teachers Retirement System of Texas, Austin, said he plans a major emerging manager initiative in the third or fourth quarter. He said he could not go into detail.

He said the system's emerging manager program for private equity has been very successful, growing to $1.1 billion today from $300 million in 2005.

At a CalSTRS board meeting in West Sacramento on June 4, the board expressed support for a plan by Chief Investment Officer Chris Ailman to develop a five-year investment plan for hiring emerging managers. The board is expected to give formal approval to the plan at a meeting in July.

“A lot of plans will hire a diversity officer, but it needs a more comprehensive effort than just one person,'' he said. Mr. Ailman said working with qualified emerging firms to help nurture them and increase their skill set is very time-consuming, but can be worth the effort.

“Not the all the best and bight people come out of New York and the Ivy League,” he said.

Mansco Perry III, chief investment officer for the $33.7 billion Maryland State Retirement and Pension System, Baltimore, said that while he strongly supports the concept of giving emerging and smaller managers a chance, ultimately the best managers — regardless of color, size or gender — should be given the mandate.

“From an investment standpoint, no ethnic group has a monopoly on investment talent,” he said. “There are a lot of talented investment organizations. Not all of them are huge and on our radar scope.”