2 U.S. public pension funds take different tacks on diversity

U.S. asset owners are focusing more on diversity and inclusion within the money managers that run their money and in the portfolio companies in which they're investing.

Pension funds that are working to enhance the diversity of their money manager lineup include the $52.9 billion Teachers' Retirement System of Illinois, Springfield, and the Minnesota State Board of Investment, St. Paul, which manages the $71.1 billion combined fund of the state's public defined benefit plans.

Illinois Teachers has been investing with minority- and women-owned firms through its 15-year-old emerging manager program, which is one of the longest running among U.S. institutional investors and is one of the principal ways the retirement system brings minority- and women-owned business enterprise money managers into the portfolio.

As of June 30, 95% of the $675 million preliminary total of the emerging manager program was managed by 17 minority- and women-owned firms. Across the entire portfolio, 28 minority/women-owned firms, including those in the emerging manager program, managed a preliminary total of $9.5 billion, or 18.6% of total plan assets as of the same date, showed a report about the emerging manager program provided to trustees by Jose Gonzalez, investment officer for the program, during a remote investment committee meeting Aug. 27.

The Minnesota State Board of Investment closed its emerging manager program in the early 2000s after all of the managers graduated to full-sized mandates within the DB plan portfolio, said Mansco Perry III, the board's executive director and CIO, in an interview.

Like the Illinois teachers' fund, MSBI investment staff are considering how best to add more diverse money managers to the combined fund portfolio in response to a recent resolution from the board, Mr. Perry said.

Diverse-owned firms, including minority-owned EARNEST Partners LLC and women-owned Zevenbergen Capital Investments LLC, both graduates of the former emerging managers program, manage a significant portion of assets of the Minnesota portfolio, but the percentage of total assets they manage is not available, Mr. Perry said.

Illinois Teachers is embarking on the fourth incarnation of the emerging managers program since it was started in 2005, which will include an additional $250 million to bring the program's portfolio up to $1 billion, the highest level to date, Mr. Gonzalez told trustees during the Aug. 27 investment committee meeting.

Mr. Gonzalez said the program will include more emphasis on high-conviction managers; a continued focus on private market strategies, including private equity and private credit; increased investment in real assets, hedge funds and other opportunistic strategies; and enhancements to the manager sourcing pipeline.

Diversity has been a hallmark of the emerging manager program since its inception when the focus was on hiring promising, newer money managers with small asset bases for modest public-market assignments of $25 million to $50 million.

The goal is to forge long-term relationships with these managers and eventually "graduate" emerging managers to larger allocations within the portfolio.

In 2010, the program was expanded to include money management firms running private market strategies.

Mr. Gonzalez told trustees during the virtual committee meeting that "my goal is to find diverse managers in every asset class."

In response to a question during the meeting from Devon Bruce, president of the board, Mr. Gonzalez explained that "part of my reunderwriting of the (emerging manager) program is to look at the diversity in workforce hiring within the managers we're considering, looking beyond the executives."

R. Stanley Rupnik, CIO and interim executive director of the pension fund, stressed to trustees that "unlike what happens at other funds, Jose is out there every day finding (emerging) managers."

In his presentation, Mr. Gonzalez said, "Engaging with the MBWE community through network partners helps to build a pipeline of diverse managers and firms," and identified 100 Women in Finance, the Association of Asian American Investment Managers and the Women's Association of Venture & Equity as entities with which TRS works for manager sourcing.

The investment staff, led by Mr. Rupnik and Greg Turk, director of investments, have begun to incorporate analysis of diversity and inclusion in evaluating managers in the retirement system's private equity, real estate/real assets and diversifying strategies (hedge funds and alternative risk premium funds), according to discussion during the meeting.

Investment officers did not provide details about the new diversity and inclusion investment analysis during the trustee meeting and investment staff declined to comment beyond the meeting.

As the emerging manager presentation was ending, Andrew Hirshman, chairman of the investment committee, said diversity and inclusion concerns "aren't social issues. They are investment issues."

The investment advisory council of the Minnesota State Board of Investment also dug into diversity and inclusion issues at the request of council member Susanna Gibbons during an Aug. 17 meeting conducted remotely.

In an Aug. 5 letter to fellow members, Ms. Gibbons urged the board to act in accordance with a resolution passed by the board in February directing the staff and board "to promote efforts for greater diversity and inclusion on corporate boards and within the investment industry."

Ms. Gibbons said in her letter that "the MSBI has done an excellent job so far of bringing these issues to light as part of its broader ESG agenda and I applaud staff for their ongoing efforts. However, the murder of George Floyd and subsequent demonstrations are forcing all of us to confront the persistent and insidious racism that remains firmly embedded in our economic system."

Ms. Gibbons' suggestions for actions included developing diversity goals and better reporting from the MSBI's investment managers; developing proxy guidelines on board diversity with achievable goals in mind; and reviewing the work of the Intentional Endowments Network, a group of 160 mission-driven institutional investors that is collaborating to meet investment objectives "through investment actions that create a thriving, sustainable economy," according to its website.

In a memo to the full board, the investment advisory council said its members "generally agree that the MSBI should continue to expand its evaluation of managers and portfolio holdings with respect to diversity and inclusion."

Mr. Perry said in the interview that the MSBI's 12-person investment staff is developing metrics for diversity and inclusion as they apply to external money managers. During due diligence, he noted, "we tell managers that D&I is important to us and we'll be encouraging managers to provide us with the appropriate metrics so we can monitor their D&I progress."

He said smaller money managers "are struggling to meet diversity and inclusivity standards, but my expectation is that over the next few years, this situation will be better."

Mr. Perry said the MSBI also is trying to increase its own workforce diversity, which isn't an easy task given the board's location in the Twin Cities where "it's a challenge to find diverse candidates."

The board is considering the launch of an internship program for high school and college students, Mr. Perry said, with the hope that young people of diverse backgrounds will choose to work there.

In addition to managing the combined pension plans fund, the Minnesota State Board of Investment as of June 30 also had oversight of $8.1 billion in public self-directed employee retirement funds and managed $23.2 billion in other state funds, for a total of $102.4 billion.