CalPERS defends record on emerging managers

CalPERS’ job is not to ‘make managers happy’, CIO Joseph Dear said at a recent hearing, while defending the system’s commitment to emerging managers.

The job of the investment staff at the California Public Employees’ Retirement System is not to make every manager happy; its job is to hit its 7.5 percent return target, according to CalPERS’ chief investment officer Joseph Dear. And frequently that means upsetting firms who don’t receive follow-on money from the system.

“It’s not my job to make managers happy,” Dear said at a hearing last week hosted by two California state senators examining emerging manager strategies. “I recognize our restructuring work and our focus on performance have caused some concern among the emerging manager community.”

CalPERS sought to explain its support of emerging investment managers amid criticism from the industry that the system is backing away from smaller, often diverse private equity firms in favour of large shops that can offer better terms. Critics have cited the system’s $100 million mandate, awarded to Credit Suisse earlier this year, to invest in emerging private equity managers over the next three years as evidence the system is backing away from the strategy. They point out the system had grown its emerging private equity manager portfolio to $1 billion from 2006 to 2008.

We observe a great retraction by CalPERS from its prior commitment to minority private equity managers.

Maria del Pilar Avila

“When we consider CalPERS' $1 billion commitment to emerging managers between 2006 and 2008, coupled with substantial direct allocations to minority emerging managers in the last decade, we observe a great retraction by CalPERS from its prior commitment to minority private equity managers,” according to Maria del Pilar Avila, chief executive officer of New American Alliance, a trade organisation representing Latino investment managers. Avila also spoke at the hearing.

CalPERS’ CIO Joseph Dear and portfolio manager Laurie Weir attended the hearing last week hosted by California state Senators Gloria Negrete McLeod and Curren Price to discuss its emerging manager strategy. The state’s teachers’ union also attended the hearing, represented by CIO Chris Ailman and portfolio manager Solange Brooks. The Senators came to no resolutions at the hearing, but invited participants to another session in October.

CalSTRS has not received as much criticism of its emerging manager efforts, in part becasue the system has committed to emerging private equity managers over the past fiscal year. CalPERS, on the other hand, has taken heat for its monetary commitment to the strategy going forward, for not re-upping with managers in the programme that are fundraising, and for firing Centinela Capital Partners, the fund of funds that has run its emerging private equity manager programme since 2006.

Overall, CalPERS has about $9.7 billion of its externally managed assets overseen by about 300 emerging managers across asset classes, Dear said, or about 11 percent of the system’s externally managed assets. Within that total, about $3 billion is managed by firms run by women or minorities, he said.
In the last three years, the system has committed about $1.1 billion to emerging managers in private equity, real estate and global equity.

However, like other public institutions, the system has been cutting back on the number of investment managers in its portfolio, he said. CalPERS has been restructuring its investment programme since the global financial crisis, when the system, like many others in the US, took huge losses. CalPERS lost about 24 percent of its assets in 2009, Dear said.

While the system has come back from the depths of the downturn, its performance, especially its five to 10 year

We're going through each strategy and asking if managers are helping us achieve our target or not, and making very tough decisions not to invest in new programmes from those managers.

Joseph Dear

return, continues to disappoint, Dear said. “When you compare CalPERS to other large public pension plans in the US over the long term, we don’t compare favourably. That’s not good enough,” he said.

“We’re going through each strategy and asking if managers are helping us achieve our target or not, and making very tough decisions not to invest in new programmes from those managers, or in taking our money back and redeploying it elsewhere in the portfolio,” Dear said.

For example, CalPERS committed $36.7 billion to private equity managers in 2006, 2007 and 2008; after Lehman Brothers collapsed, the system committed $5.1 billion in 2009, 2010 up to mid-year 2012, Dear said.

“There’s a lot less money going out and it’s no surprise people in the industry are concerned,” Dear said.