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.