Texas Teachers has further evolved its emerging manager program, launching EM 3.0 which includes a further $3 billion allocation to emerging manager partners. Head of the division Kirk Sims explains.

It is my privilege to lead the emerging manager program (EMP) at the Teacher Retirement System of Texas. The EMP allows structural flexibility, which I will outline below, that blends inclusion with innovation. I joined TRS in early 2019 knowing this opportunity is grounded in TRS’ strong appetite to build long-term relationships with the next generation of high performing managers. Previously I was responsible for the emerging manager program at Illinois Teachers Pension.

TRS is a $150 billion defined benefit pension plan and is currently the 6th largest fund in the US. The plan serves nearly 1.6 million participants and in 2018 paid more than $10 billion in benefits.  The investment management division has 160 employees and commits to investment strategies that are both internally and externally managed.  The EMP is a long-tenured platform (it began in 2005) with the initial capital being dedicated to private equity investments. This launch could be considered the initiation of what I will call EM 1.0.  The program evolved over its first seven years, adding real assets, hedge funds and long only managers to its portfolio of investments.

The next generation of the program would see significant growth in allocated capital, while adding co-investments to the investment menu. This version of the program, EM 2.0, was highlighted by the maturing of existing relationships which in turn allowed managers to begin graduating from the Program into the main Trust.

Emerging managers 3.0

In 2019, with the launch of EM 3.0, TRS has further evolved the EMP.  Coinciding with this phase, the TRS board of trustees approved a permanent allocation of 1.1 per cent of the trust to the EMP.  This dedicated capital, which allows for increases as plan assets rise, is significant because it allows TRS to engage with the emerging manager community in new and innovative ways.

Evolving the program to its current EM 3.0 state required significant support from the board of trustees and the investment management division.  It has been my experience that the most successful emerging managers programs have strong advocates within the board of trustees. At TRS, the plan benefits from the unified vision of the board chair and the chief investment officer.  This vision permeates throughout the various investment teams and allows a robust opportunity set for engaging with our emerging manager partners.

Specifically, EM 3.0 established two new pools of capital for the emerging manager program.  EM Innovation and EM Select. The expectation is that these two initiatives will allow $3 billion to be allocated over a three- to five-year time horizon:

EM Innovation– creates an open architecture platform across multiple structures in order to dynamically invest with emerging managers. This platform allows investments in more unique structures outside of the traditional fund of funds model used in many EMPs.  EM Innovation allows investment across the spectrum, from fundless sponsors to mature emerging managers. Seeding vehicles, joint ventures, first time funds and increased co-investments are all possible investment structures. EM Innovation gives the overall program the ability to identify successful deal makers and invest in individual opportunities as they arise.

EM Select– allows TRS to continue to invest with a select group of exceptional managers which have shown excellent performance and have matured beyond the traditional definition of an emerging manager. The platform enables these managers to transition from the emerging manager program into the regular trust investment programs.  One of the biggest challenges faced by all emerging manager programs is how to “graduate” the manager from the program into the main portfolio, given the size of checks normally written by the trust. As is typical for public pensions, TRS has a scarcity of internal resources and so has a limited ability to make smaller investments.  However, because of the past demonstrated success of the EMP, TRS has chosen to allocate these resources to develop relationships with graduates of the program. TRS is one of the few programs that has a dedicated pool of capital to help with this transition and has committed $1 billion to the EM Select program.

Program partners

Given the scale of the EM 3.0 and the complexity of doing principal investments, it was prudent for TRS to find highly competent partners to engage with TRS personnel. The EMP chose two such partners:  Grosvenor Capital Management for private markets investments and RockCreek for hedge funds and public equity investments.  Both of these firms have proven expertise in sourcing managers and generating significant alpha for their clients.

Inclusion on multiple levels

The TRS emerging manager program, by its very existence is inclusive. It is extremely challenging for smaller managers to break into the investment portfolios of larger pension funds.  Average check sizes are too large for where the emerging manager is within the firm’s life cycle.  For example, a $150 million fund I launch is well under the radar for a pension that typically makes $200-300 million commitments.

An additional challenge for emerging manager programs includes performing due diligence as attribution/track record for a potential emerging manager may not be portable or is less than three years old.

However, the EMP at Texas Teachers’ has allowed new managers an opportunity to grow their business and establish a track record of success long before they have the scale to be an investment in the trust portfolio. This initial capital allocation enables TRS to establish strong relationships with the managers which continue to develop over time as the firms grow. And while several pension plans around the country share this inclusive traditional model for their EMPs, TRS has expanded inclusivity beyond this model with EM 3.0.

TRS’ EM Innovation program enables investments with managers that don’t want or cannot execute more traditional fund structures. The expansion beyond the traditional fund structure and co-investment opportunities in turn, allows greater potential for alpha generation within the program.

Another definition of inclusion is a focus on diverse managers in both ethnicity and gender.  The EMP is currently 52 per cent minority or women-owned, having crossed the 50 per cent threshold this year. Increasing the opportunity set for diverse managers is one of the goals of EM 3.0 and I expect the 52 per cent to keep rising over time.

In closing, the launch of EM 3.0 has provided TRS of Texas a unique opportunity to engage at a high level with the emerging manager universe.  As the program head, I am excited to lead this charge. Over the next 12 months, expect to see me and members of my team at numerous industry events.  We look forward to helping launch the newest generation of successful managers for the benefit of us all.

Kirk Sims heads TRS’ emerging manager program.

 

 

In 2013 the $42 billion Illinois Municipal Retirement Fund (IMRF) decided to reduce its exposure to active large cap equity and terminated a $166 million mandate with its emerging manager Piedmont Investment Advisors, a minority and women-owned asset manager in Durham, North Carolina.

It’s not easy breaking into the asset management industry at the best of times. New, small, or minority and women-owned business enterprise (MWBE) managers face a range of challenges from the struggle to invest the large cheque sizes an average pension fund needs to deploy, to the absence of a decent track record because they are new.

More recently, as in Piedmont’s case, the shift to passive strategies and fee compression has made it even harder. Despite the growing body of research that shows the diversity, fee and first-mover advantages from investing in funds off the beaten track, MWBE managers account for just 1.3 per cent of the global $69 trillion asset management industry, according to research from Bella Research Group and the John S. and James L. Knight Foundation.

But 2013 wasn’t the end of the road for Piedmont and IMRF. In many ways it was the catalyst that has allowed Piedmont to take its offering to the next level. Piedmont was still managing a $100 million core fixed income strategy for IMRF which, like the active equity allocation, dated from the start of their relationship in late 2004. When one of IMRF’s other minority managers closed its doors due to industry headwinds, and the asset owner launched a new search for a passive replacement, Piedmont saw the opportunity to push into the passive space and put itself forward once again.

At that stage Piedmont’s only passive mandate was a $3.2 billion allocation benchmarked to the Russell 200 for North Carolina Department of State Treasury’s $90 billion pension fund. Following lengthy rounds of due diligence on its investment and operational capabilities, IMRF allocated a $1 billion Russell 1000 Growth index strategy to Piedmont in a vote of confidence in its growing passive prowess. Since IMRF’s endorsement, six more funds have chosen the manager to run various passive strategies.

“IMRF has been a visionary in this regard. They have given an opportunity to a minority and women owned firm and helped increase competition in a segment dominated by the biggest players in the industry,” says Sumali Sanyal, Piedmont’s co-chief investment officer of equities and portfolio manager.

Beliefs

Both Sanyal and Rosa Vasquez, investment officer of IMRF’s emerging manager program who returned to IMRF in 2015 after a year heading up New York State Common Retirement Funds emerging manager program, believe a key reason for the success of the relationship is rooted in IMRF’s core belief to invest in emerging managers.

It’s no coincidence that their relationship has flourished from the year the pension fund pinned its colors to the mast in a flagship policy. IMRF has invested with emerging managers since 1994 but in 2004 the board of trustees formally adopted a goal for the utilisation of minority and women-owned firms in a public commitment.

Since then the program has grown from $1.7 billion across 15 managers to $8.7 billion, equivalent to 22 per cent of IMRF’s total AUM, invested with over 50 emerging managers in direct and manager of manager programs across domestic and international equity, fixed income, real estate and alternatives in allocations that are central to the total portfolio rather than limited to a pre-specified carve out.

More recently, the fund has come out with fixed targets to pay a proportion of its overall fees to emerging managers.

“We expect our emerging managers’ share to be at least 20 per cent of fees paid to all managers,” says Vasquez.

It’s a commitment that stands head and shoulders above most funds, even MWBE-committed peers like CalPERS, which has promised to allocate $11 billion of its $340 portfolio to new commitments to emerging and transition managers by 2020 or the $193 billion New York City Retirement Systems, which allocates $8.8 billion to small and emerging managers.

Today’s relationship is also rooted in IMRF and Piedmont’s history, where Sanyal hopes a slow and cautious start offers hope for other emerging mangers who cite initiating relationships with large institutional investors as one of their biggest challenges.

It all started with IMRF choosing Piedmont to run a $14 million large cap core equity mandate through a manager of managers platform. Seven years later Piedmont graduated to run a $131 million direct allocation until the mandate was axed in 2013.

Today IMRF’s relationship is helping Piedmont broaden its offering again. The manager typically runs separately managed accounts for its institutional clients. Indeed, one of the benefits of its passive mandate with IMRF is that assets are held with IMRF’s custodian.

“One of the reasons IMRF saw that there was no incremental risk for them in allocating sizable assets to a liquid mandate was because these assets are managed in a separate account and reside with their custodian,” says Sanyal.

However now Piedmont is looking to add to its stable, exploring launching co-mingled funds or collective investment trusts (CITs). One of the manager’s first calls for insight was to IMRF following which the pension fund facilitated an introduction to specialists at Northern Trust.

“Seeding our existing strategies in CIT vehicles is more challenging as a smaller firm,” explains Sanyal. “We have open lines of communication. If either of us has any questions or concerns or needs feedback on industry related issues we get on the phone and have a conversation.”

In a quid pro-quo, IMRF has called on Piedmont to help it develop an in-house factor allocation that it plans to launch in 2019.

IMRF’s role in attracting more investors Piedmont’s way has helped solve one of the other key challenges emerging managers face. Large institutional plans are reluctant to represent a disproportionate portion of a smaller firm’s assets, hesitating to seed products and allocate meaningful assets, explains Sanyal.

Piedmont only manages $4.7 billion and along with the $1 billion passive allocation, IMRF is also Piedmont’s largest fixed income investor via its core fixed income strategy. IMRF says any risk of over exposure is countered by its diverse manager roster and the problem was eased last year when asset management firm FIS Group acquired Piedmont, creating a new entity with a combined $10 billion AUM.

Fees

Favorable fee structures are one of the biggest benefits of investing with emerging managers and Sanyal observes that providing IMRF with a competitive fee structure has been a “primary concern” with the two “working together” to “modify fee structures.”

Because IMRF’s MWBE program is an integral part of the total portfolio the fund doesn’t separate cost or returns of MWBE and non-MWBE managers, explains Vasquez.

However, she does say that “that the IMRF portfolio generates strong returns while keeping costs low”.

Over the last decade IMRF has outperformed its total fund benchmark and its 7.5 per cent assumed rate of return by 46 basis points and 174 basis points, net of fees, respectively.

In 2017, IMRF paid 28 basis points in fees while the US pension fund median was 36 basis points, all adding up to strong returns, low costs and a dedicated, bespoke relationship that is often lost with the big firms.

“One of the main things IMRF appreciates from minority owned firms is their dedication to the IMRF portfolio that they manage,” concludes Vasquez.

 

The Climate Disclosure Standards Board (CDSB) and the Sustainability Accounting Standards Board (SASB) have worked together to produce a practical guide for companies looking to implement the Task Force on Climate Related Financial Disclosures (TCFD).

While more than 600 organisations have supported the TCFD, the implementation of its recommendations have been slow, so CDSB and SASB have drawn on their well-established reporting frameworks to produce the guide that shows companies, in a very practical way, how to implement the recommendations.

Director of research at SASB, David Parham, said there has been great interest from companies wishing to manage their exposure to climate risk, demonstrated by their commitment to the TCFD proposals.

“But one of the challenges has been in companies needing practical resources to implement the recommendations. Through our partnership, and our standards,we can give practical tools to companies to effectively implement.”

The guide is rooted in practical examples with “mock disclosures” created for three fictional companies in the oil and gas, automobile and agriculture industries.

“We chose those industries to show how each of them have very different climate-related risk exposure, and demonstrate how to use the tools to really robustly meet the TCFD recommendations – which can be done in any of those three industries using our guidance,” Parham said.

Institutional investors can take comfort in the fact that the frameworks used for disclosure are focused on disclosure information that is material to investors, Parham said.

“Investors can help advocate and encourage companies to use the framework so investors can get the information they need. It is also useful fromthe perspective of seeing how the quantitative metrics can inform an investors’ understanding of howthe companies are performing, and then interpret the effectiveness of a company’s governance of this risk and risk management of its strategy,” he said. “It can help investors see how important it is to have continuity and how KPIs help drive performance.”

It is also important for investors to have an understanding of how different reporting frameworks can work together to enhance the quality of information they are receiving, he added.

When the TCFD released its final recommendation in 2017, its chair Michael Bloomberg, who is also chair-emeritus of the SASB Foundation Board, said the widespread adoption of the taskforce’s recommendations would ensure that the effects of climate change become routinely considered in business and investment decisions.

“Adoption of these recommendations will also help companies better demonstrate responsibility and foresight in their consideration of climate issues. That will lead to smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-carbon economy,” he said in a letter to Mark Carney, chairman of the Financial Stability Board,at the launch of the report.

The premise of the new guide is to demonstrate that the principles-based TCFD recommendations can be less daunting to implement than they might originally appear.

 

 

Institutional investors’ investment strategy should be serving the China middle class and the dislocation from within Asia, according to Stephen Kotkin,Professor of History and International Affairs at Princeton University speaking at the Fiduciary Investors Symposium at Cambridge University.

Kotkin explored what the geopolitical conflicts of the past can teach us about the future. He looked at some of the key points in history, how China, the European Union and the US have survived, and what it means for the future.

He said “we are currently experiencing a global turning point but we don’t know where it’s going because we’ve never been able to know it in real time”.

 

Listen to a podcast of his presentation here

For more coverage of the Fiduciary Investors Symposium at Cambridge University click here.

Foundations have trillions of dollars in assets but often only leverage 5 per cent towards grant making that advances their mission. Just imagine what we could achieve if we leveraged the other 95 per cent?

The Nathan Cummings Foundation (NCF) is on a mission to find out. Founded by Nathan Cummings, an innovative risk-taker and entrepreneur, the foundation is committed to honoring his legacy by working to create a more just, vibrant, sustainable, and democratic society.

Now, we are one of the largest multigenerational family foundations to publicly commit to align 100 per cent of our nearly half-billion dollar endowment with our mission. We came to this unanimous decision by our board one year ago after a thoughtful and intentional process that led us to three core drivers:

  • First, we knew it could be done because of the many examples in the marketplace.
  • Second, we knew that the two biggest challenges we face – inequality and the climate crisis – are market-based problems that need market-based solutions.
  • Finally, we knew this was not time for business as usual. From the rise in hate crimes to the emerging risks associated with the climate crisis and growing inequality, times like these require visionary thinking and bold action. And we recognised that capital markets needed to evolve to address these issues.

Ultimately, we believe mission-aligned investing is the future of philanthropy and that we have a responsibility to use all of our resources – our investments, our grants and our voice – to make a difference in the world.

When I joined the organisation in 2015, NCF was already a leader in active ownership strategies, and known for finding creating ways to leverage its assets. As a social justice foundation, rooted in Jewish values, we have a long history of pushing companies to effectively manage risks and opportunities associated with environmental and social causes through active ownership.

Guided by our values, the NCF Board created the Assets Aligned for Impact Committee in 2011, which carved out a portion of our endowment for impact investing. When I joined the foundation as its fourth president, I brought with me a steadfast commitment to putting the force of our endowment towards our mission. Before embarking fully on this journey, we brought on Sonen Capital and intentionally created an inclusive learning and decision-making process. We added knowledge and expertise to our board and investment committee, reviewed market trends, engaged with foundation colleagues and networks to learn from their experiences, and partnered with our investment manager, Global Endowment Management, to begin implementing our mission-aligned portfolio in 2018.

As we move towards full alignment, we are using the broadest definition of our mission to open up the widest opportunity set in the marketplace, using all the tools available to achieve market-rate returns. Our investment team is working with the Impact Management Project to make sure stakeholderimpact including employees, community and planet and not just shareholders, is at the center of our approach to mission-alignment across sectors and asset classes. Our multi-generational board has been deeply engaged and energised throughout this process.

I am more convinced than ever that this was the right decision. Every day, we are bucking the traditional playbook, which tells businesses that their highest calling is to generate profit for their shareholders and that it’s too costly for businesses to invest with their values or consider the long-term sustainability of their practices.

At NCF, we’re not buying the old playbook. And neither should you. Here are three reasons why.

First, we can have a market that works for all of us, instead of just a few. As just one example, women only receive a fraction of venture capital, despite launching more than 1,800 new businesses every day in the US. By seeking more aligned investment strategies, including a focus on identifying and investing with diverse fund managers, NCF has added 150 diverse fund managers to our investment pipeline.

Second, we can leverage our power to serve the needs of the people, instead of powerful corporations. For example, our portfolio includes an organic food delivery platform that requires 100 per cent supply chain transparency to ensure fair labor practices and provides equity to all employees. We’ve also redeployed distributions from traditional real estate projects into affordable housing projects that will extend affordability in some of the US’s least affordable areas for the next 40 years.

Finally, we can halt the climate crisis and create an inclusive clean economy that builds wealth for those who have been left out of the dirty one. Businesses and investors cannot afford to ignore environmental and social issues. A recent meta-study found a positive correlation between ESG factors and financial performance in 60 per cent of the studies they examined. In fact, looking at our investments through an ESG lens doesn’t jeopardise our fiduciary role, it strengthens it. Because it’s good risk management, our investment firm has incorporated ESG factors into traditional investment management.

Over the last 27 years, NCF has provided nearly $500 million in grants to support social movements, organisations and individuals pursuing justice for people and the planet. But the extraordinary challenges we face cannot be solved by grant making alone. Capital markets have to change to drive sustainable and inclusive growth and a more just and democratic society.

Foundations have trillions in assets, but often don’t recognise or activate the full extent of their resources. By harnessing the full potential of our assets, whether that’s through active efforts to change corporate behavior, divestment, or intentional investments in companies and strategies that align with your values, we can activate the power of our investments to achieve the future we all want and deserve.

Mission-aligned investing is one powerful and often underutilised tool in our toolbox. I urge you to use it more.

Sharon Alpert became the NCF’s fourth president and first female leader in November 2015.

 

 

Illinois State Treasury is planning a new $700 million allocation to student loans in the first investment of its kind for any US state treasury. The $32 billion state treasury, comprising key portfolios that include the $14 billion State Investments portfolio, the $10 billion College Savings Plans and a trail-blazing auto-enrolment Secure Choice Retirement Savings Program for Illinois residents without a workplace pension, forecast to grow to $10 billion in the next six years, has never been scared to innovate.

But the latest initiative, waiting to be signed into law, aims to offer a first of its kind solution to Illinois’s cash-strapped students labouring under the nation-wide challenge of rising tuition fees.

“Our aim is to lower the cost of student loans for Illinois students,” says Rodrigo Garcia, deputy treasurer and CIO at Illinois State Treasury where he reports to incumbent Treasurer Michael W. Frerichs.

“We have a lower cost of capital compared to what is currently available for many students and we want to use our patient capital to help. We can lend at lower rates and still have an acceptable level of return,” he says.

As it waits for the legislation to pass and sign into law, Illinois is exploring different strategies which span issuing loans itself, to working with banks. It is also looking at the best way to invest over multiple years. Possible structures include purchasing student loans on the secondary market as investments, partnering with financial institutions which will invest in student loans on its behalf at below market rates, or refinancing student loans that have already been issued. Illinois could also develop income sharing agreements for its students that involve equity-like structures whereby students payback a percentage of what they earn that rises the more their income increases, a little like selling stock in themselves.

“We are not sure how we will do it, but all options involve lowering the cost of capital,” says Garcia.

The investment size of the mooted portfolio will match Illinois’s existing $700 million Growth and Innovation Fund, ILGIF, which comprises private equity and venture capital investment in the state, targeting both impact and strong returns. ILGIF has returned 12.6 per cent since inception in April 2016 and its impact has been just as meaningful, spanning job creation, SME expansion and providing investment opportunities for minority managers.

“We don’t have this level of impact or return forecast for our student loan fund at this stage. It still needs to be approved and turned into law,” says Garcia.

ILGIF sits in Illinois’s $14 billion State Investments portfolio, the rest of which is invested in fixed income products in a dynamic, internally managed portfolio that includes US Treasury’s, municipal bonds, repurchase agreements and corporate bonds. Short, medium and longer-term maturities out to 10 years ensure a comfortable level of liquidity and risk in line with Illinois’s medium-term liquidity priorities. Given the fund finances traditional government functions like road building, healthcare and education it’s loath to lock-up funds for the really long-term, although Garcia acknowledges liquidity needs would never be 100 per cent of the portfolio.

“We don’t want to expose the State Investment portfolio to excess risk. Our intent is to use fixed income to create market returns and be able to provide liquidity within acceptable levels of risk,” he says.

In another strand to the strategy, Garcia has also grown wary of long-term bonds in the last six months because of the inverted US yield curve, which has seen short-dated yields rising above long-dated yields for the first time in over a decade.

“We are looking to see what’s going to happen. Because of the j-curve (partially inverted yield curve), we are keeping more of a focus on shorter investments compared to six months ago. We’ve come down on our weighted asset maturity over the last six months to keep us nimbler,” he says. The fixed income portfolio returned 1.52 per cent in 2018 and has returned 2.17 per cent to date this year. The possibility of higher returns from equity investment is confined to the $11 billion College Savings Plan, where assets are split between equity (50 per cent) fixed income (40 per cent) and other, and Secure Choice’s equity allocation. Illinois’s total equity exposure is around $5 billion.

Another first

In another first, Illinois became the first state treasury to join the PRI last August in a decision motivated by a desire to measure the fund’s ESG integration against peers. It was also born out of Garcia’s belief that ESG integration is a crucial extension of financial and fiduciary prudence and “a great value-add” for institutional investors that goes beyond SRI or negative screening.

“ESG really talks about the non-traditional financial impact. For example, the financial impact of soil erosion on agricultural companies, rising sea levels on insurance companies, hacking on tech companies, or the use of child labour in foreign countries on US-based companies. Ultimately, as this information becomes more widely reported, more and more state and local treasuries will adopt these strategies, but for us, it is about knowledge and education,” says Garcia, a former marine who credits his experience serving in Iraq and Afghanistan for his motivation in helping to drive change across the investment strategy.

ESG is integrated throughout the portfolio and combines traditional fundamental analysis with a sustainable overlay based on the Sustainability Accounting Standards Boards (SASB) framework.

“We overlay sustainability across our equity, fixed income and private markets. We don’t subscribe to the notion you can only integrate sustainability in equity,” he says.

He also believes that the growing availability and standardization of ESG data, and the growth in the number of companies adapting to the SASB framework, will make integration easier going forward.

“There has been an evolution in ESG towards more quantitative analysis. Before, we saw lots of qualitative reports and glossy marketing materials. Now there are more metrics and data and it is increasingly standardised,” he concludes.