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Expanding Investment Opportunities Through Diversity

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  • PCA report of P and I data found of 256 large firms >$2 b. 13 were owned by women and minorities (2002). Of 397 small firms , $2 b. 61 were owned by women and minorities.
  • Wall Street Project found of 74 large public sector pension plans in 20 states with highest black population, 49 (66%) were not using any black money managers.
  • Severely blighted urban areas will require government, non-profit organizations and entrepreneurial real estate developers to initiate urban revitalization.
  • CalPERS is the largest defined benefit pension fund in the United States with current assets of $206 billion US (Feb. 14, 2006). The plan covers 1.4 m. public sector employees and retirees in the State of California. Developed in state investment policy in 1992 – currently 11% of total portfolio invested in state of California including public equity firms headquartered in California ETI Policy Added focus on underserved capital markets in 2000 in ETI policy
  • CURE pioneered with California Urban Investment Partners (CUIP) in 1997 Allocations range from $40 m to $750 m. two of the largest are MacFarlane (CUIP) and CIM
  • 16.3% in annual returns as of Sept. 30 2005 on 4 year old program. Impacts include limited access to capital, employ workers in LMI areas, companies with female or minority management. 65 of 68 investments met at least one of the benchmark ancillary benefits – 39 met two 18 all three
  • Appropriate compensation packages must be developed for internal money managers of targeted investment portfolios. Sensitivity to emerging trends provides early mover advantage in rapidly shifting markets. Track records and relationships remain key to fund manager selection. As with all asset classes, top quartile investment vehicles are always in demand. Commingled, pooled funds with reciprocal investment capability provide good opportunities to diversify targeted investment and reduce risk. Fund of funds vehicles can also provide diversification for pension fund investors. In both cases external money managers insulate pension funds from charges of political interference in investment selection.
  • Appropriate compensation packages must be developed for internal money managers of targeted investment portfolios. Sensitivity to emerging trends provides early mover advantage in rapidly shifting markets. Track records and relationships remain key to fund manager selection. As with all asset classes, top quartile investment vehicles are always in demand. Commingled, pooled funds with reciprocal investment capability provide good opportunities to diversify targeted investment and reduce risk. Fund of funds vehicles can also provide diversification for pension fund investors. In both cases external money managers insulate pension funds from charges of political interference in investment selection.
  • Transcript

    • 1. Expanding Investment Opportunities Through Diversity Tessa Hebb, Senior Research Associate [email_address] Pension Funds and Urban Revitalization Project, Labor and Worklife Program, Harvard Law School Sponsored by the Ford and Rockefeller Foundations
    • 2. Presentation Overview
      • Pension fund investment opportunities through diversity
      • Emerging managers programs
      • Emerging domestic market investments
    • 3. Pension Fund Emerging Manager Programs
      • Investment firms with less than $2 billion under management.
      • Often these firms have short track records.
      • We find many women and minority-owned investment firms in this category.
    • 4. Current Research Findings
      • Attitudes to Diversity in the Fund Management Industry, (2005) CalSTRS and Leading Edge Investment Advisors
        • Key Findings: Biases against women and minorities still exist.
      • A Review of Developing Managers and Developing Manager Programs, (2003) PCA
        • Key Findings: Consolidation in the industry over time. Some significant risk-adjusted benefits associated with specific developing managers in specific time periods.
    • 5. Research Findings Cont.
      • Performance Characteristics of Emerging Firms (2005) Leading Edge Investment Advisors.
        • Key findings: advantage of small firms: greater performance without necessarily assuming higher risk.
      • Potential Benefits of Investing with Emerging Managers (2006) Northern Trust Co.
        • Key findings: 287 firms with emerging managers 33% of sample found emerging managers comprised 39% of top quartile performers in the sample. Significant out performance in down-markets was found.
    • 6. Current Emerging Managers Programs
      • $3 b. committed to CalPERS’ Manager Development Program I.
          • 14 firms and 2 strategic partners
          • Manager Development Program II announced in 2004 (includes hedge funds)
      • $1 b. committed to CalSTRS’ Emerging Manager Program (2005 figures)
          • 19 minority firms and 3 strategic partners
    • 7. Domestic Emerging Market Investments
      • Types of targeted investment
          • Private equity
          • Real estate
          • Fixed income
          • Credit enhancement
      • Success if measured in risk adjusted rates of return
      • Pension funds are not market makers
    • 8. CalPERS’ and CalSTRS’ Targeted Investments
      • Geographic targeting: underserved capital markets
      • CalPERS’ Real Estate – CURE Program
      • ($3.4 b. committed – 2005)
      • CalPERS’ Private equity – California Initiative ($475m. committed)
      • CalSTRS’ California urban and rural investments ($2.08 b. committed, credit enhancement, real estate, stocks, mortgage-backed securities, home loans)
    • 9. CalPERS’ California Urban Real Estate (CURE)
      • Thirteen vehicles in targeted real estate
      • Emerging managers key in this program
      • Broad geographic focus
      • ‘ Location, location, location’
      • CURE program initiated in 1997
      • IRR 22.2% since inception
    • 10. Targeted Investment in Urban Revitalization – Hollywood CA Woolworth Building: Hollywood CA CIM Group
    • 11. CalPERS’ Private Equity
        • California Initiative started in 2000
        • Ten vehicles of varying types across all stages
        • Large and small investments - $200 m. to $10 m.
    • 12. CalPERS’: California Initiative Pacific Community Ventures: Planet Organics – San Francisco
    • 13. Steps in Targeting Investment
      • Board level champion
      • Board direction “let’s look at..”
      • Staff get outside expert study
      • Boards set broad targets
      • Select appropriate asset class and amount
      • Issue RFP
      • Hire top-quartile manager
    • 14. Best Practice in Pension Fund Domestic Emerging Market Investment
      • Success is measured first in risk-adjusted rates of return
      • Geographic rather than social targeting
      • Set broad targets
      • Allow top-quartile vehicles to do their job
    • 15. Conclusion
      • There remains bias in the market both for emerging managers and emerging domestic markets – both have implications for diversity.
      • Research shows emerging manager programs have potential to outperform without adding excessive risk.
      • Targeted investment can generate risk-adjusted rates of return and healthy, vibrant, diverse communities.
      • For more information visit: http://urban.ouce.ox.ac.uk