Large money managers such as J.P. Morgan Asset Management, Fidelity, Allianz Global Investors, and Hermes Investment Management were among firms terminated by the California Public Employees’ Retirement System (CalPERS) last year as the pension plan got rid of most of its external managers.
The names of some of the fired money managers were contained in documents obtained by Chief Investment Officer under the California Public Records Act.
The documents offer more information on the decision by CalPERS, the largest US pension plan, to reshape its equity program last year and move almost all of its assets in house. CalPERS had refused to say which managers were terminated.
The decision essentially ended a long-term debate by pension system investment officials over continuing to pay external managers millions of dollars in fees. Almost all of the fired managers had been under-performing index strategies for at least the past five years, and in many cases longer. The affected money managers either declined comment or didn’t return requests for a comment.
At the same time, they were receiving a total of $100 million in fees, CalPERS statistics show.
Back in early February 2019, when the manager firings began, CalPERS’s approximately $180 billion equity portfolio was mostly in internally managed equity strategies. But CalPERS still had more than $37 billion managed by outside managers.
That was all about to change.
CalPERS slashed the overall allocation to outside external managers to $5.5 billion from $33.6 billion, in the process cutting 14 of the 17 managers, shows an October 21 memo by pension plan Chief Executive Officer Marcie Frost.
The memo to CalPERS board members also reveals that CalPERS Chief Investment Officer Ben Meng had restructured the pension plan’s emerging manager program. He fired four of five manager of managers programs that included many money management firms owned by African Americans and women.
The allocation to emerging managers dropped to $500 million from $3.6 billion.
The documents obtained by CIO show that CalPERS fired its first external manager, Fidelity Institutional Asset Management, in mid-January 2019. The firm had been managing about $1 billion for CalPERS.
Next came Pzena Investment Management in February 2019. Pzena managed aboutn$800 million for CalPERS in two separate investment strategies.
The firing of the first two firms was already in motion before Meng took office in January 2019, sources say. Meng, however, began a full review of the entire external equity manager program after the first firings, the sources say.
It took until July for CalPERS investment staff, under the direction of Meng, to begin their next moves. In that month, four money managers were fired, the documents show.
Lazard Asset Management, which managed $892 million, Epoch Investment Partners ($1.2 billion), Allianz Global Investors ($2.6 billion), and J.P. Morgan Asset Management ($2.4 billion) were all cut from CalPERS.
In August, Cartica Management ($470 million) and Hermes Investment Management ($800 million) were both told they would no longer be managing money for CalPERS, the documents show.
The next plan of attack by CalPERS investment officials was terminating most of its equity emerging managers program.
On October 21, the same day of the letter by Frost, CalPERS investment staff notified four of the five manager of manager groups that they were being terminated.
Fired were Strategic Investment Group, which managed $700 million for CalPERS, FIS Group ($615 million), Leading Edge Investment Advisors ($673 million), and Progress Investment Management ($600 million), the documents obtained by CIO show.
Each manager of managers ran a lineup of smaller money management firms, each that managed part of the overall share of money given to the manager of managers. When CalPERS fired the four manager of managers, it actually terminated several dozen money managers.
The results overall of the manager of managers were among the poorest in CalPERS overall external equity program and CalPERS investment officials had debated for several years whether to terminate the managers.
Frost said in the October 21 letter that over the past five years, traditional external equity managers have underperformed their benchmarks by 48 basis points and emerging manager of managers by 126 bps.
Then there was the matter of the $20 million in fees for the emerging managers program. CalPERS had to pay twice—for the overall four manager of managers firms, then for each of the two dozen or so managers under the auspice of each of the four firms.
It might have seemed like a no-brainer to get rid of the four manager of managers. The problem was the lineup of managers they were fielding were mostly minority- and women-owned firms and CalPERS investment officials were concerned that some California state legislators could complain.
CalPERS has faced legislative hearings several times in the past decade on its lack of minority-owned firms in its portfolio. Some of the legislators who held hearings in the past had also received campaign contributions from the women- and minority-owned firms.
Frost noted the sensitivity of the issue of terminations in her October 21 letter.
The memo notes that the move terminating emerging managers “could receive media or legislative attention.”
In addition, CalPERS had featured some of the manager of managers programs at yearly diversity forums, aimed at showing women- and minority-owned money manager firms that they, too, could get a piece of the CalPERS money pie.
Meng, sources say, decided the manager of managers had to go, part of efforts to increase returns over the next decade.
CalPERS has estimated that it will only earn 6.2% per year on average over the next decade even though its assumed rate of return is 7%. If that happens, its funding level of approximately 71% could go down further.
This would require even more contributions from hard-pressed municipalities and school districts, unable to afford their already rising CalPERS bill.
Unlike the other external money managers who were terminated in a matter of weeks, CalPERS gave the manager of managers time to end their relationships.
The October 21 termination letter from the pension plan gave the four manager of managers until the end January 2020 to end their relationship with CalPERS.