California funds working to hire more emerging firms

Officials of California's two largest pension funds said Friday they are aggressively expanding efforts to hire emerging managers to increase manager diversity.

They were speaking at a state legislative hearing in Los Angeles. The meeting followed a state law passed in October that requires the $223.1 billion California Public Employees' Retirement System and the $146.2 billion California State Teachers' Retirement System to develop five-year plans for emerging manager participation and to report to the Legislature yearly on their efforts.

State Sen. Curren Price Jr., chairman of the Senate Select Committee on Procurement, a key sponsor of the law, said Friday's hearing will be the first of several this year looking at the progress and barriers that emerging investment firms face in getting contracts with California public funds.

Christopher J. Ailman, CalSTRS chief investment officer, said his fund plans to hire a consultant soon to determine how to increase emerging manager representation in the system's real estate portfolio, which now has only one emerging manager. He said that lone manager is struggling due to the economic downturn. Mr. Ailman did not identify the manager.

Mr. Ailman said the system is also considering giving separate account mandates to emerging managers now in an emerging manager fund of funds with CalSTRS and increasing their allocations to $200 million to $500 million from $10 million to $20 million now. But Mr. Ailman said state bidding rules and existing contracts with the fund of funds are making separate account hirings hard to do.

Mr. Ailman said CalSTRS already uses emerging managers for about 10% of its actively managed investments.

He said while some pension plans outside of California only deal with the issue of hiring a diverse base of money managers on an occasional basis, that was not the case for CalSTRS. “This is not just a side issue for us,” he said.

Laurie Weir, global real estate portfolio manager at CalPERS, said the system has increased allocations to emerging managers by about $1 billion within the past year and was planning to increase representation of such managers specifically within both its private equity and real estate portfolios over the next few months.

The efforts will include using a real estate manager that will act as a mentor and hire emerging real estate firms, she said.

CalPERS did not provide details on how much of its assets are run by emerging managers.

Several other states, including New York, Maryland and Illinois, have passed laws regarding the hiring of emerging managers. Illinois' law, considered the most aggressive in the nation, requires the hiring of emerging firms and defines them as firms owned by minorities, women or the disabled.

The definition of emerging managers is broader in California and other states.

New York City Comptroller Jon Liu said on Jan. 17 that the city's five pension funds plan are expanding their commitment to minority- and women-owned firms by $500 million this year.

The comptroller said the plans, with $115.2 billion plan in combined assets, already have invested $6 billion with firms owned by women and minorities.