CIOs of large public systems explain how new managers can get their money

  • CIOs of Texas Teachers, Florida SBA, NYS Teachers and Texas ERS discuss EM strategies
  • Pension funds want specialized strategies, diversity and, above all, returns
  • EMs need patience, persistence to win mandate

Large public pensions are always on the lookout for new talent and smaller managers, and the CIOs of four large pension systems recently shared advice to firms looking to break in.

The CIOs of the $151 billion Florida State Board of Administration, $150 billion Teacher Retirement System of Texas, $120 billion New York State Teachers’ Retirement System and $28 billion Texas Employees Retirement System discussed their approaches to finding new managers at Texas Teachers’ annual emerging-manager conference on Feb. 7.

While each pension fund has its own policies, some common themes that emerged included the importance of specialization, the need for patience and a sharp focus on returns.

Returns are king

All four CIOs said emerging managers need to punch above their weight if they’re going to catch a pension fund’s attention.

“It’s well-established in the academic literature that small or newer managers, for whatever reason — hunger, motivation — tend to produce some pretty persistent alpha over the years,” Florida SBA’s Ash Williams said.

Texas ERS CIO Tom Tull said his fund is looking for emerging managers who can outperform the bigger players in every asset class.

“We love you folks, but the bottom line is performance, and we’ve been able to generate an excess of 300 basis points relative to our established managers by using emerging managers,” Tull said.

Texas Teachers has committed $3.7 billion to emerging managers, with another $2 billion committed to the program and $1 billion set aside to help managers graduate into the system’s core PE portfolio.

“Over time, we’ve realized that these small and emerging managers do have some special sauce and they have some more flexibility, some quicker moves, than some of our large firms,” said Texas Teachers CIO Jerry Albright. “They have demonstrated their ability to add alpha over a period of time.”

Find a way to stand out

Pension funds want to see emerging managers nail down a unique approach before they consider adding them to their rosters.

“In recent years, we’ve added more and more specialization in our portfolio, particularly in the private market areas,” Williams said. “If we can go down that road, it makes more sense than having a very broad and undistinguished portfolio.”

Research can give emerging managers a big advantage when pitching a public pension, and firms should take advantage of opportunities to to get to know systems and their consultants before pitching a strategy, according to the CIOs.

“All of our information is public — we’re government entities,” Albright said. “Go to our information pages, figure out what we do, figure out where you fit in.”

NYSTRS, for example, has created new allocations to private credit and global equity, and has not been shy about its desire to tilt its PE portfolio away from large buyouts, said CIO Thomas Lee.

Managers need to accept that pension funds also may be reluctant to pursue strategies that carry headline risk, Williams said, citing investment strategies around financing plaintiff lawsuits and buying life settlements.

“A couple of different things we’ve looked at seem to have some investment appeal, but frankly the optics of them were less than ideal,” Williams said.

Be patient and listen

It may take time for an emerging manager to get its foot in the door with a public-pension investor, but the process ultimately can give the firm more credibility in the market, Lee said.

“Don’t get too discouraged because you’re not going to get a mandate tomorrow or next year,” Lee said. “I think this is a long road. Over time, as we get to know you better, as our strategies change, that’s where you have an opportunity to leverage a relationship and put your particular strategy on our radar screen.”

Tull said Texas ERS is looking for long-term relationships and won’t hesitate to critique managers who haven’t done their homework.

“We want to be candid, and we don’t want to waste our time or your time if we feel that maybe you should go back and reevaluate what you’re doing and how you’re doing it,” Tull said.

Williams likened a pension portfolio to a complex railroad system, where expansions can be both necessary and time-consuming.

“You need to understand that while we’re running our railroad, we might be able to work you in and build a new route or add a new car or whatever it may be, but it may take two years,” Williams said.

“During that time we will continue to have a dialog, and that dialog will be valuable for both of us. You will get the benefit of our experience, and we will get the benefit of your perspective.”

Don’t limit yourself to formal EM programs

Many pension funds do not have formal emerging-manager programs, but that doesn’t mean they’re not open to hearing from new firms.

“We don’t have a formal program or a mandate or set aside, but that said, we’ve been very sensitive over the years to finding talent,” Williams said.

In addition to reaching out to pension funds directly, emerging managers have a number of ways to put themselves on the map.

Getting to know fund-of-funds managers can be a good way to gain entry into a pension fund’s portfolio, according to Tull and Lee, whose pensions used such vehicles to build up emerging-manager exposure.

Consultants are another good point of entry, as are professional organizations, like Toigo Foundation and Women on Wall Street, according to the CIOs.

Many pension funds, including Texas Teachers and NYS Teachers, also host conferences for emerging managers.

Action Item: Check out the agenda for NYSTRS’ upcoming emerging managers conference here