10.20.2011

Pensions Tee Up for New Managers

10.20.2011
Terry Flanagan

New laws force emerging fund managers upon pension giants, increasing the competition for the alternative landscape.

This past September, California governor Jerry Brown signed into law senate bill 294, which stipulated that large pension funds will need to start investing heavily with “emerging fund managers.” California is home to two of the nation’s largest pensions: the California Public Employees’ Retirement System (CalPERS) and California State Teachers Retirement System (CalSTRS), at almost $236 billion, and $130 billion in assets, respectively.

Often touted for their perhaps innovative strategies, small and midsized alternative asset managers have been reportedly favorable to institutional investors. The movement to force investment with emerging managers will increase fierce competition among new funds, according to Thurman White, chief executive of Progress Investment Management, a fund-of-funds that only works with emerging managers. The firm has more than $7 billion under management.

“The start-up alternative fund space will be increasingly competitive and emerging managers will have to show consistent investment performance in order to win business,” said White. “Furthermore, emerging managers will need to demonstrate that they have the infrastructure to manage larger assets that comply with institutional investor guidelines.”

With diversification comes competition, which will also drive down expenses, noted White. He estimates that $20 billion in public employee pension dollars from these states have flowed to emerging managers; in addition to California, New York, Maryland and Illinois have also enacted the new emerging manager law.

“Emerging managers will need to prove that they have the ability to be long term investment partners who can weather market fluctuations and cycles,” said White.

“The general idea behind enacting this law was to create a focused initiative to support CalPERS and CalSTRS using emerging managers across all asset classes to diversify the kind of managers the funds work with,” White told Markets Media.

Pensions who have historically favored managers with “longer track records,” will need to acclimate most to the new law.

“It is important that investors take qualitative, not just quantitative, information into account when assessing emerging managers. Qualitative information, such as experience, investment strategy and process is just as good of a proxy when choosing to invest with a new manager.”

White highlighted that “emerging” managers are often mistaken for inexperienced investors, and clarifies that such managers are simply those with smaller asset sizes—“or boutique investment firms.”

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