NYC Pensions Plan to Bankroll More Emerging Managers

The proposed $1 billion allocation to unestablished hedge funds and bond managers would bring the program's total size to $14 billion.

(April 28, 2014) — New York City Comptroller Scott Stringer has announced a $1 billion investment plan with emerging managers for the city’s five pension funds.

The funds have already committed more than $13 billion to such firms, $10 billion has been pledged to minority and women-owned enterprises. The newly-proposed allocation—which is “subject to appropriate due diligence”—would expand the existing emerging manager program to two new asset classes: hedge funds and opportunistic fixed income.

“The plan to allocate $1 billion to emerging managers is a major investment in diversifying our roster of investment managers and improving the risk-adjusted returns of the pension funds,” Stringer said.

The comptroller’s office defined emerging managers as firms of limited size or tenure—less than $2 billion of assets under management or track records shorter than two years. It also includes organizations that “may have been overlooked by traditional search processes,” such as those primarily owned by women or minorities.

“The funds are constantly on the lookout for the most talented investment managers in the world,” Stringer said. “Today we are saying that our doors are open to those firms that can demonstrate to us that they have what it takes to grow our pension funds.”

Institutional investors have demonstrated greater appetite for top-tier firms than developing ones, due to possible limitations in knowledge, resources, or connections, according to research by the National Association of Investment Companies (NAIC). However, despite the industry’s wariness, they have found support from certain “progressive leaders and institutions through bold leadership, comprehensive planning, and development of innovation programs.”

For the California Public Employees’ Retirement System, California State Teachers’ Retirement System, and New York State Common Retirement Fund, the paper said, “the primary reasons for the increased use of emerging managers was to achieve the highest rate of total return reasonably possible with prudent levels of risk and liquidity.”

What managers lack in size and track record they can make up for with nimbleness, according to NAIC.  The ability to invest in small- to medium-sized companies may provide a “great source of uncorrelated alpha to any diversified portfolio of alternative assets.”

New York City’s $150 billion retirement system began acting on this investment belief in 1991 and has continued to add to its program since then.

As of the end of last year, the city’s five funds together had emerging manager investments of $5.7 billion in public equities, $1.5 billion in fixed income, $300 million in real estate investment trusts, $5.2 billion in private equity, and $271 million in real estate. 

This latest allocation plan is subject to trustees’ approval prior to implementation.

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