Calpers Drops Most ‘Emerging’ Equity Managers as Returns Lag

(Bloomberg) -- The California Public Employees' Retirement System is sharply scaling back its use of external “emerging” equity fund managers, a potential blow to efforts to promote diversity, as the largest U.S. public pension reworks strategies to meet its return target.

Calpers launched its emerging manager program in 1991, according to its website. Many of the firms are led by women and minorities, and eligible candidates have less than $2 billion under management. But the effort has fallen under the same pressures facing traditional managers -- the need to produce acceptable gains.

Returns from traditional and emerging managers overall haven't contributed enough to achieving Calpers's 7% annual target, Chief Executive Officer Marcie Frost wrote in an Oct. 21 memo to the board, a copy of which was seen by Bloomberg.

“In past three months we reduced traditional external managers from $30-plus billion to $5 billion -- from 17 managers to three,” Frost said in the memo. The pension is “now also restructuring emerging manager program and reducing number of managers -- from five to one and $3.6 billion to $500 million.”

Pension funds across the U.S. are striving to cut costs, improve returns and shore up their long-term funding status. Calpers, with $387 billion in assets as of Dec. 3, has long been trimming ties with outside managers. The process accelerated under Chief Investment Officer Ben Meng, who started in January.

Calpers spokeswoman Megan White, responding Wednesday to a request for comment, said the reduction “isn't new news.” CIO magazine earlier reported the move.

Traditional managers have underperformed their benchmarks by 48 basis points over the past five years net of fees and emerging managers by 126 basis points, according to Frost.

In the fiscal year through June 30, Calpers spent $119 million on external equity managers who oversaw $29 billion, according to an October presentation to the board. The reduction in managers will save $100 million annually, according to Frost's memo -- $80 million from traditional managers and $20 million with emerging firms.

She didn't name managers who may be cut, but said the investment team would “begin notifying our emerging manager advisers who will no longer retain a mandate from Calpers.”

The pension system lists five global equity advisers for the emerging manager program on its website: FIS Group, Leading Edge Investment Advisors, Legato Capital Management, Progress Investment Management and Strategic Investment Group. Advisers construct portfolios of smaller asset management firms for Calpers.

Clayton Chui Jue, CEO of Leading Edge, said his firm has been notified that its contract is ending, though “technically we're still managing money.” Calpers is a “substantial” customer for his San Francisco-based company, which represents 50 small money managers, many of whom are led by women and minorities, he said in an interview.

Representatives for the other advisers didn't immediately reply to requests for comment.

Focusing on achieving the best risk-adjusted returns should be the priority at Calpers, according to board member Margaret Brown, who applauded the manager reductions.

“It's about time we put our fiduciary duty ahead of politics,” Brown said in an email.

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Josh Friedman, Dan Reichl

©2019 Bloomberg L.P.