The director of the Teacher Retirement System of Texas’s emerging manager program answers five questions, including what TRS looks for in emerging managers, if the funds it has committed to share any traits, and what the future holds.
What are you looking for from emerging managers?
The market environment has been getting more challenging. We’ve seen some nice returns, but there are active managers who’ve struggled for a variety of reasons. This environment encourages us to focus more closely on asset allocation and manager selection. Asset allocation is important because that decision drives a large portion of portfolio performance. Yet manager selection cannot be ignored. I’ve seen situations where a few underperforming managers negated all the positive performance coming from the asset allocation decision.
Our program seeks to invest in best-in-class managers. We have a fixed amount of capital to allocate. If we allocate it to one manager, that’s capital we can’t allocate to another. So finding best-in-class managers is not only important for the portfolio, but also to the emerging manager community. Best-in-class managers who meet our allocation needs deserve a capital allocation.
TRS has committed $1.9 billion to emerging managers. Are there any traits they have in common?
What is most common is an interest in developing an expertise and a competitive advantage. They often identify areas of the market that may be overlooked by larger firms or they may have developed unique, propriety methods or modelling techniques. They may be involved in a relatively new area such as behavioral finance, forensic accounting, advanced technical analysis or forecast generation. What is important to many of them is to have a niche or focus where they can be best in class. These managers provide us with the opportunity to benefit from areas which are often overlooked by larger firms.
Does TRS do true first-time funds or just spin-off funds?
We have one of the most open definitions of what constitutes an emerging manager. Our requirement is that a manager have less than $2 billion in AUM. That’s it. It allows us to consider all managers that come to us who have less than $2 billion in AUM. The result is that we see a wide variety of managers and we are able to invest across many different asset classes. We will invest in first-time funds but also second- and third-time funds. Our openness sets us apart from firms that are more restrictive.
You joined TRS in December after 14 years at Oppenheimer Global Management and elsewhere. What have you learned about the origins of the TRS emerging managers program?
It was launched in 2005. The TRS Board of Trustees were visionaries and saw that capital was not being allocated to emerging managers. They wanted to change that. Creation of this program ensured that emerging managers who met our investment standards could receive a capital allocation. Chief Investment Officer Britt Harris and Jerry Albright, deputy CIO, were instrumental in executing this vision, and within a very short time the nation’s leading emerging manager program had been developed. They ensured that a leadership position was not only established but maintained. By the end of 2009, the NAV of the portfolio was $262 million with $650 million in commitments across 30 funds. From 2010 to 2014, TRS moved into an expansionary phase. The portfolio was diversified across all asset classes: real estate, private equity, alternative investments, and traditional assets. Additional staff were hired to work solely for the program and consultants were added to assist with operational and investment due diligence. The result is that today we are now able to review hundreds of managers within a given year.
Edited for clarity by Steve Gelsi