CalPERS slashes equity emerging managers program

Updated with correction

CalPERS slashed its equity emerging manager program and shifted even more of its equity assets in-house over a three-month period ended in October, resulting in equity emerging manager of managers Legato Capital Management being its sole equity emerging manager and 95% of its $187.1 billion global equity portfolio internally managed.

CalPERS will now have $500 million with equity emerging managers, down from $3.5 billion invested with equity emerging managers as of June 30 and only $5 billion in the hands of external managers from around $30 billion, CalPERS spokeswoman Megan White said in an email.

Legato's portfolio is also being reduced; it had managed $887.8 million as of June 30, CalPERS data shows. Eric Pollack, managing member at Legato, could not immediately be reached for comment.

These are just the latest cuts to its equity emerging manager program and movement of capital in-house by California Public Employees' Retirement System. The Sacramento-based pension fund had already slashed assets managed by emerging managers to $2.9 billion from $16.6 billion in fiscal year 2019 and reduced its lineup of equity managers to 17 from 23 in the year ended June 30, according to an analysis of public data by Pensions & Investments.

The most recent round was the result of a staff evaluation of its entire equity portfolio including its emerging manager program begun 18 months ago. Although the review began before CalPERS CIO Yu Ben Meng joined the $388.4 billion pension plan in January, he "fully supports the effort to sharpen our investment focus," Ms. White said in an email. Ms. White said she does not have a list of the five equity emerging managers that were terminated.

CalPERS now manages 78% of the total fund internally.

"It is a key part of Ben's focus on risk and on making investments that can hit 7% assumed rate of return," Ms. White said.

The reorganization of its equity emerging manager program leaves Legato with but a sliver of the $6.1 billion portfolio it ran for CalPERS as of June 30, 2018. Several other emerging manager firms are no longer running the multibillion-dollar portfolios they were before the start of the 2019 fiscal year.

The emerging manager firms that were on CalPERS equity manager list as of June 30 are emerging manager-of-manager firm Progress Investment Management Co., where the CalPERS portfolio had already dropped to $602.2 million as of June 30 from $3.9 billion a year earlier, emerging manager fund-of-funds firm Leading Edge Investment Advisors' portfolio fell to $673.3 million as of June 30 from $3.1 billion as of June 30, 2018, and Strategic Investment Management LP's portfolio. down to $700 million as of June 30 from $3.5 billion.

"CalPERS is not stopping (the) emerging manager program," Ms. White said. "We will continue to engage with EMs across all asset classes where active risk is deployed and continue evaluating (the) program. In addition, we will continue to aggressively evaluate the entire portfolio to ensure all investments can help us achieve needed returns."

CalPERS had also trimmed in a three-month period that ended in October its roster of global equity managers and reduced the portfolios of those that remained in fiscal year 2019. Equity managers no longer on CalPERS' roster included First Quadrant, which managed $1.1 billion, Huber Capital Management LLC, which had a $213 million loss, Pzena Investment Management which lost $2 billion, State Street Global Advisors, which had managed $3.6 billion and the Boston Co. Asset Management with $592 million. None of the managers could be immediately reached for comment.

CalPERS board members reached by Pensions & Investments favored the move to internal management as a lower-cost way of managing pension fund assets.

"I support 'significant savings' in fees from the manager terminations: $80 million from traditional equity managers and $20 million from the emerging managers by bringing more duties in-house for better transparency and accountability," said California Treasurer and CalPERS board member Fiona Ma in a tweet on Dec. 5.

CalPERS board member Margaret Brown also applauded the move.

"It's high time that management made the call to drastically reduce or completely eliminate investments that have historically underperformed," Ms. Brown said in an email. "Up until now, employers and ultimately taxpayers have been paying the bill for these poor investment choices. The board has not been provided a timeline as to how long it will take the investment staff to redeploy these dollars, but I'm thankful we are finally doing what is best for beneficiaries."

Ms. Brown declined to provide further details.

Separately, former CalPERS board member J.J. Jelincic has withdrawn his challenge to Oct. 17 election in which he failed to win a seat reserved for a retiree on the CalPERS board held by Henry Jones. In a Oct. 21 letter to CalPERS CEO Marcie Frost withdrawing his protest, Mr. Jelincic said he did not lodge a protest to overturn the election results.

"Rather, I had hoped to spotlight problems with the current election system in order to improve the process going forward. Sadly, the current appeals process doesn't allow this to happen," he said.

He said that he disagrees with CalPERS' position that the protest panel may not even consider the propriety or legality of the election regulations. He restated some of the reasons for his protest including that CalPERS press office had solicited negative stories in the press about past alleged occurrences of sexual harassment and that Mr. Jones as CalPERS board president had allowed negative comments about Mr. Jelincic during two board meetings prior to the election.

In his withdrawal letter, Mr. Jelincic said that CalPERS' position is that a regulation barring CalPERS staff from using his or her official position to favor one candidate over another applies only to the candidates and the staff directly involved in the election. He also said that Mr. Jones was not acting as a candidate but in his official capacity when he allowed the comments during the August and September board meetings.

In an email, CalPERS spokeswoman Jeanie Esajian declined comment.