Knowledge. Experience. Integrity.
Negotiating the Dual Realities Facing Diverse and
“Callan’s Diversity and Inclusion Policy
describes our involvement and support of
an inclusive community to ensure continued
diversity within the firm. We look for this
same commitment to diversity in all of the
managers we research.”
Ron Peyton, Callan’s Chairman and CEO
Ron Peyton is Chairman
of Callan’s Emerging
and Minority, Women,
The past year has featured the acquisitions and closings of several diverse and emerging manager firms,
highlighting the variability of possible outcomes that fledgling businesses in this arena face. On one hand,
institutional investors are increasing their interest in diverse and emerging managers as they seek diver-
sity and new talent for their rosters. On the other hand, these managers contend with mounting client
demands, distribution limitations, declining mandates, and an overall downward pressure on active man-
agers and management fees.
The relentless migration to alternative strategies from traditional stocks and bonds, and the desire by
investors to differentiate their portfolios, provides aspiring managers both a challenge and an opportu-
nity. How can they take advantage of the shift while reconciling the two realities? What can they do to
be positioned for success?
Callan has long been on the forefront of these issues, from our founder Ed Callan’s significant role in the
founding of Progress Investment Management Company more than 25 years ago to the recent success
of our Callan Connects program. Callan’s Published Research Group interviewed two of our experts,
Chairman and CEO Ron Peyton and Callan Connects Manager Lauren Mathias, to get their perspective
on the diverse and emerging manager arenas.
Callan has an extensive history with diverse and emerging managers. Where did it start?
Ron: Our founder, Ed Callan, decided he wanted to get into the manager-of-managers business, so
in 1990 he personally provided most of the capital for the launch of Progress Investment Management
Company, which was a major event in our industry and a game-changer for emerging and diverse manag-
ers. Progress was the first multi-manager asset management organization committed to promoting diver-
sity within the institutional investment community.
Ed had tremendous foresight and was emphatic that we take a leadership position on this subject. He
leaned heavily on Callan Associates to do the research. We created a database of the emerging managers
that would be the initial participants in the manager-of-managers fund being sold to institutions.
What did Mr. Callan see that others didn’t at the time?
Ron: He saw a demand for diverse and emerging managers from public funds, utilities, and consumer-goods
companies, but there was no practical way to implement. Trustees sought their inclusion, but were frustrated
because most emerging managers were just too small. By combining them into multi-manager portfolios,
Progress created a solution to address the scale considerations faced by institutional investors.
We recognize that there continues to be a growing imperative within these funds to include diverse and
emerging managers. One-third of Callan’s clients are public funds, and they make up approximately half
of the assets for which we’re responsible. We also think these managers can bring a lot to the table from
an investment perspective.
What do you see as their competitive advantage?
Ron: Size is an issue with managers. You can’t be nimble if you have a tremendous amount of assets
under management. Callan’s President, Greg Allen, published a paper several years ago showing that
small cap managers could attribute 75% of their success to their “smallness,” while just 25% was attribut-
able to skill. Their agility allowed them to take advantage of opportunities better than their larger peers. We
think this may apply to smaller managers in general.
The other thing about these managers is that they can be willing to take on more investment risk than estab-
lished firms because they are more ambitious to demonstrate their talent. An established firm is not going
Offering first or
A short product
of less than
ownership, may also
be referred to as
3Knowledge. Experience. Integrity.
to take a lot of business risk because it doesn’t want to lose what it has. There are two sides to this issue, of
course. A small firm can get too ambitious and blow up. But if you pay close attention to governance, have
smaller mandates, and multiple diverse or emerging firms, you can spread out that business risk.
Finally, there’s the entrepreneurial aspect that comes with being an emerging manager. The firm’s leader-
ship tends to have more “skin in the game” and is typically closer to the product and its implementation.
Lauren: Diversity has become a priority in the investment management industry, not just at an organi-
zational level, but also at the firm’s board level. In order to beat the market you have to be different from
the market, which means you have to think differently. Diversity gives you a great edge in that respect.
Have you seen an increase in the implementation of diverse and emerging manager programs?
Ron: We have seen an increase in the public fund arena, and more limited growth on the corporate and
foundation sides. We see more implementation within public utilities. They are under a lot of pressure to
hire managers that reflect the diversity of their populations. Consumer-goods companies are also more
likely to show interest because of their diverse customer bases.
Let’s talk implementation. Do more clients use a manager-of-managers program or do they go direct?
Lauren: I’d say that about two-thirds of plans invest with diverse and emerging managers through a man-
ager-of-managers program. Direct investment is sometimes challenging for large plans because the dollar
amount they want to invest tends to be too much for smaller managers to take on. Using a manager-of-
managers approach provides a work-around because it allows these plans to allocate large dollar amounts
across multiple managers.
Also, most large funds don’t have enough dedicated research support to analyze individual manager risk.
This is what a manager-of-managers program does—that’s their job. With this structure, fund sponsors
have outsourced the research and the due diligence, just like a hedge fund, private equity fund, or a real
estate fund (of funds). It makes a lot of sense. Some Callan clients do have direct investments in diverse
and emerging managers. We’re able to provide a high level of support in these cases because of our long
and involved history in the space.
“We are encouraged by searches and hires
where the mandates did not specify emerging
or diverse managers as a condition. Because
we did the necessary research to qualify them,
these managers will continue to be able to
compete against mainstream firms and prove
themselves to investors.”
Lauren Mathias, CFA
Senior Vice President, Global Manager Research
oversees the Callan
which enhances Callan’s
coverage of emerging
managers and minority,
women, and disabled-
Callan Connects was founded in 2010 to expand the firm’s universe of emerging managers, as well
as firms owned by minorities, women, and disabled people. Lauren, for nearly six years you’ve
been holding quarterly sessions in major cities across the country in an effort to get to know as
many of these managers as possible. What trends do you see in terms of product offerings?
Lauren: This has definitely changed over the years. We’ve now met with around 240 firms. In the beginning
we saw mostly managers of long-only U.S. equity strategies. As allocations have changed among larger
plans, the diverse and emerging manager spaces have adapted. We observe more strategies in non-U.S.
equity with a sprinkling in fixed income. I would say the greatest growth is coming from the alternatives side.
We’ve noted a lot more direct hedge funds and real estate funds—even some private equity, as well.
To what do you attribute this proliferation of alternative strategies?
Ron: Managers have asked themselves, “Where am I going to fit? How am I going to work with large public
funds that are decreasing their allocations to public U.S. equity?” I think these managers understand where
the market is going. They’re following the cues of their larger peers. Based on what we’re seeing from our
clients, public funds are really interested in alternatives and non-U.S. equity.
By the Numbers
Number of Callan Connects
meetings since the
Number of distinct investment
strategies within Callan’s pro-
prietary database managed by
firms classified as MWDO
Number of all Callan meetings
with MWDO firms in 2015*
Number of Callan clients
utilizing MWDO firms52
Number of firms classified as
MWDO in Callan’s database130
Assets managed by MWDO
firms for Callan clients$21B
As of September 30, 2015, unless another date is indicated.
*Through October 31, 2015. Includes MWDO meetings through Callan Connects.
**Since inception in May 2010
We launched Callan Connects in 2010 to expand our universe of emerging managers and minor-
ity, women, and disabled-owned (MWDO) firms. One day each quarter is reserved for meeting with
emerging managers with less than $3 billion in assets, as well as MWDO firms with less than $10
billion. We hold meetings in major U.S. cities to minimize travel for firms in or near these locations.
5Knowledge. Experience. Integrity.
How else would you say the diverse and emerging manager universes have changed since 2010?
Lauren: Both of these universes have become more concentrated during what has been a really challeng-
ing time for active management in general. Whereas mainstream managers have muddled through, a fair
number of diverse and emerging managers have gone out of business. A lot of them haven’t been able to
win new mandates because they have legacy, long-only U.S. strategies. Anecdotally, I can think of three
U.S. equity emerging managers that have gone out of business in the past year. At the
same time we’ve observed very little new-firm formation.
Is the barrier to entering the market greater now than it was when Callan Connects
started in 2010?
Ron: I think so—it’s the market. Active management has always been the secret sauce for
diverse and emerging managers, and confidence there has waned in the bull market for
passive that we’ve been experiencing. Starting a new business is difficult when you’re up
against that sort of skepticism. We’re also in an increasingly more regulated world—compli-
ance, operations, and technology costs are substantial. In order to be institutionally viable,
managers need to find the right outsourced partners or internal systems.
There’s been a slowdown in the graduation process of diverse and emerging manag-
ers into mainstream investment programs. Why?
Lauren: There are two reasons for this: lack of firm formation and asset allocation trends.
Think of emerging managers as sitting in a circle within a plan sponsor’s program. In order to
leave the circle, they must grow to a size that allows them to graduate into a mainstream role.
However, even if they do, the plan sponsor faces the challenge of finding a manager that is
“more emerging” to replace them, and there aren’t that many competitive new firms out there.
From an asset allocation standpoint, a manager may reach a size where it thinks it’s ready for the main-
stream, but if the strategy is long-only U.S. equity—and the plan is already at its maximum allocation—
there’s nowhere for the manager to go. For defined benefit plans, the cash flow is negative. More is going
out for benefits than is coming in from contributions. Because of these factors, you sometimes end up with
a plan that’s static because the drivers that create movement don’t exist. While many plan sponsors lack a
clear graduation process, we are seeing more actively addressing the issue.
Annual Callan Connects
meetings since program
Historically, firms have only
met with Callan via Callan
Connects once, then they initi-
ate contact via meetings with
our Global Manager Research
team. Thus, these numbers
generally reflect unique,
individual firms that were new
Beyond Callan Connects
To improve emerging and diverse
manager hiring in the institutional
community, these managers need
direct access to consultants, staff, and
decision makers to cultivate the nec-
essary trust in a relationship. In addi-
tion to Callan Connects, Callan has a
formal, ongoing meeting policy for our
consultants and manager research
analysts to ensure they are respon-
sive to meeting requests from all man-
agers in Callan’s database. Managers
can access a guide for working with
Callan on our website under Callan
Connects to effectively reach our con-
sultants and research analysts (see
Communicating with Callan).
Ron: It’s not like a firm can go from emerging to mainstream manager—boom—just like that. There’s an
adolescence, a middle ground. I hear a lot of these firms complain that they’re too large to be considered
emerging, but too small to get the mandates that big, mainstream managers get.
What “parenting advice” would you give these firms to help them cope with the adolescent years?
Ron: They have to realize that this period exists. The industry will call these firms “emerging” even after
they’ve emerged. Also, these managers should be mindful that they cannot afford to take their money out
and spend it on things that aren’t necessities. They have to leave it in the firm. The company needs to
remain well-capitalized because cash is king for any business.
Lauren, through Callan Connects you’ve had the opportunity to see a lot of firms come and go.
What advice would you give to a new diverse or emerging firm that would give it the best opportu-
nity for success?
Lauren: First and foremost I would say that you have to have enough working capital to last at least three
years, because that’s the cycle of new business. You have to have the conversations, meet the right peo-
ple, and show a track record. You won’t make it if you expect to have money coming in soon after launch.
The biggest mistake these managers make is assuming that if they build it, clients will simply come.
Second, you need to have a strong alpha proposition
in an area of the market in which clients are currently
looking to invest. The manager has to be able to state
clearly and concisely the anomaly they are seeking to
exploit and how they have the expertise to do it. Finally,
it helps to have professionals on board who have had
a successful track record elsewhere. This builds client
(and prospective client) confidence and trust.
Ron: I would add that it’s really important to have
an institutional mindset from the get-go. That means
having the right operations and back office in place.
In order to make institutions comfortable, you need
to show that you have a support staff that will enable
you to run your business prudently. Having the right
investment professionals isn’t enough.
Ron, over the years you’ve probably developed
an instinct for managers that will succeed and
those that won’t. What is the one factor that tends
to tilt the scales?
Ron: In one word: trust. Successful managers antici-
pate the consultant’s inherent fear of the unknown,
and help to address it. By their nature, consultants
are hesitant with firms they don’t know. After all, we’re
Researching and Engaging with
Diverse and Emerging Managers
• Databases (e.g., Callan, eVestment, Altura)
offer access to quantitative information
• Publications like Emerging Manager
Monthly reveal industry updates and trends
• Conferences provide opportunities to con-
nect. Many are industry-sponsored (e.g.,
RG&A Consortium, Opal Emerging Man-
ager Summit, SEO Alternative Investments
Conference) and other events are hosted
by fund sponsors (e.g., CalPERS, Texas
Teachers). Fund sponsors are also invited
to attend Callan Connects events.
• Industry associations are excellent resourc-
es (e.g., National Association of Securi-
ties Professionals, New America Alliance,
Association of Asian American Investment
Managers). The Robert Toigo Foundation
is a source for identifying qualified candi-
dates for employment.
7Knowledge. Experience. Integrity.
in the business of removing risk and keeping our clients from experiencing failures and embarrassing
headline risk. Unless we have done considerable due diligence to develop trust, we’re not going to be
comfortable saying, “Here’s this new manager. Here’s the next big thing.”
To help instill trust in their operations and processes, emerging managers can adopt the Asset Manager
Code of Professional Conduct, which is a system of ethical principles developed by the CFA Institute that
puts client interests first. If managers can demonstrate that they are in alignment with these principles, it
calms fears and puts them on a more even playing field with mainstream managers that have well-estab-
lished oversight and compliance processes.
What manager qualities stand out the most in Callan Connects meetings?
Lauren: I’m impressed with managers that have a five-year plan for their business. They have a keen
grasp on their structure, critical asset levels, and key triggers for growth. Knowing what the road to success
looks like gives a very positive impression.
Some firms will skip over vital points in their histories, so I’m really taken by those that are transparent.
They know that in order to understand their future, we have to get a grasp of the past and any ownership
changes, asset fluctuations, or structural evolutions that have taken place.
To stand out, managers should cover more than performance. People and process matter, too. Performance
is important, but we want to know how you got there and the structure that makes success repeatable.
Needs capital to invest and build track record
Needs to see a proven track record
Needs fee revenue for sustainability and growth
Needs a fee incentive to offset the
Needs guidance and feedback to become
Needs to focus their limited resources
on managing the plan
Needs autonomy and flexibility to
Needs added control and mechanisms
to provide downside protection
Emerging Manager Needs
vs. Investor Needs
Lauren, what would you say is the future of Callan Connects? Are you anticipating any changes?
Lauren: Our clients are interested in investing with diverse and emerging firms and there is a significant
amount of money at play. We’ve found Callan Connects to be a great way to unite those interests.
One of the byproducts of meeting with managers from a relatively confined universe is that, at some point,
you’ve met most of them. This is especially true with the low level of firm initiation that we described before.
Over the last year, we’ve seen a decline in the number of managers at each of our quarterly meetings,
which we think is due to low firm initiation, as well as the fact that we’ve already canvassed most of the
diverse and emerging manager universe at this point.
We’re now going to pivot some of our focus to reengaging with the managers we’ve met in the past and fur-
thering our communication with those trying to get out of the “adolescent” years. Some remain on the small
side and it may be difficult to visit a Callan office, so we are traveling to them to keep the dialogue going.
Ron: I think this is a very positive development. If you’re circling back with these firms after four to six
years, it means that they have proven themselves to be viable. The biggest fear consultants have about
these firms is whether or not their strategies are sustainable. The fact that we’re meeting with them again
would seem to indicate that they have a durable model and maybe it’s time for them to grow.
Let’s say you have a crystal ball. Five years from now, what do you see happening in this area?
What do you hope will be happening?
Lauren: More plans will engage with the concept of diversity. Firms are becoming more thoughtful about
who they hire. As that happens, larger plans will be given the opportunity to hire managers that reflect the
diversity of their fund beneficiaries.
I hope we move into a period where it will be easier for firms to be creative, and for entrepreneurs to realize
their dream of having their own investment firm. We’ve had a challenging cycle for active management, but
my hope is that going forward things will be more in the active managers’ favor.
Ron: We’re not where we need to be, but we are making progress. When I
came into this industry 40 years ago, there were hardly any women, which is
no longer the status quo. Look at Callan as an example; women now make
up half of Callan’s workforce and half of our management committee. We
are far from where we should ultimately be, but to me this signals an open-
ness to change.
I truly hope that the term “diverse manager” becomes a thing of the past.
That is a very long-term hope and there are miles to go, but I think obsoles-
cence of that term is the end game. We are hoping for an industry in which
every manager is diverse. One last thing to remember is that all managers
were once emerging managers.
Callan’s Diversity Policy
Callan’s culture is one of inclusion and mutual respect.
We are proud to support a collegial, diverse workplace
where people of all backgrounds want to work together
and collaborate in an environment of mutual support.
Ours is an inclusive business environment and we are
committed to ensuring that our firm reflects the diversity
of the communities we serve. Our clients benefit from
the rich diversity of ideas, experiences, skills and per-
spectives each associate brings to our firm.
9Knowledge. Experience. Integrity.
About the Authors
Lauren E. Mathias, CFA, is a Senior Vice President and U.S. equity investment consultant in Callan’s
Global Manager Research group. Lauren is responsible for research and analysis of U.S. equity invest-
ment managers and assists plan sponsor clients with U.S. equity manager searches. In this role, Lauren
meets regularly with investment managers to develop an understanding of their strategies, products,
investment policies and organizational structures. Lauren also oversees the Callan Connects program,
launched in 2010, which enhances Callan’s coverage of emerging managers and minority, women, and
disabled-owned firms. Lauren is a member of Callan’s Emerging and Minority, Women, or Disabled-
owned Managers Committee and a shareholder of the firm.
Lauren joined Callan’s Client Report Services group as an analyst in October 2004. Prior to Callan, she
assisted an independent financial planner in preparing financial plans for individual investors.
Lauren graduated from California Polytechnic State University, San Luis Obispo in June 2004, Magna
Cum Laude with a BS in Business Administration, concentrating in Financial Management and Enter-
prise Accounting with a minor in Statistics. She has earned the right to use the Chartered Financial
Ronald D. Peyton is Chairman and Chief Executive Officer for Callan Associates Inc., an employee-owned
firm whose mission is: “Collaborating with each client to build tailored and lasting investment solutions.”
Ron provides firm-wide oversight by conferring with associates and clients to improve communications,
process, and service quality. He regularly meets with senior industry professionals and actively engages
in industry and community events to advocate for the institutional investment industry. Ron is Chairman
of Callan’s Management Committee and the Emerging and Minority, Women, or Disabled-owned Manag-
ers Committee. He is Chairman of Callan’s Board of Directors and a shareholder of the firm.
He serves on the Board of the United Way of the Bay Area, for which he is the Development Committee
Chair. He also serves as Chairman of CFA Institute Asset Manager Code of Professional Conduct Advi-
sory Committee, and is a member of the Strategic Advisory Committee for the CFA Society San Francis-
co. Ron serves as “Counselor” for the Indiana University Kelley School of Business Dean’s Council. He
is also an advocate for the Vista Center for the Blind and Visually Impaired, which Callan has supported
for more than 20 years.
Prior to joining Callan in 1974, in addition to other financial responsibilities, Ron worked with Marathon
Oil Company’s pension investments while serving as an officer in the U.S. Army Reserve. Ron earned an
MBA degree in Finance and a BS degree in Accounting at Indiana University.
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