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Thurman: Okay, well good morning. My name is Thurman White from Progress Investment
Management Company in San Francisco. On behalf of CalPERS and our panelists, we want to welcome
you to the Global Equity breakout session. I'm going to let each of the panelists introduce
themselves before we begin. We'll start with you, John.
John: I'm John Cole at CalPERS. I am responsible for the strategy and development in global
equity. A little bit of background, two years in public service, two years at CalPERS. Prior
to that, 22 years as portfolio manager and Equity Chief Investment Officer and then another
20 years on the finance side and corporate side of the table.
Tina: I'm Tina Byles Williams. I am the founder and CIO of FIS Group. We are privileged to
be strategic partners with both CalPERS and CalSTRS, and look forward to this discussion.
Nancy: I'm Nancy Calkins. I'm the Chief Investment Officer at San Joaquin County Employees' Retirement
Association. I started my career, Jerry Brown was governor the first time. And I am also
a former employee of CalPERS. And I worked with Progress more than 20 years ago, so I
know CalPERS has had the program for more than 20 years. And after CalPERS, I went to
Washington State, where I worked with Chris Ailman and Joe Dear at different times. And
then I came back down to California in 2007 for San Joaquin County and I still have a
job, so we've got a great board. They separate people and events and here I am. Glad to be
here.
Candace: I am Candace Ronan with CalSTRS. I am responsible as a portfolio manager for
the global equity externally managed portfolio. I like to say I'm the new kid on the block.
I started with CalSTRS about six months ago, almost exactly actually. And I now like to
say that I have more than three decades experience in finance and investment management.
Thurman: So, our purpose this morning is to really focus on a couple of things and so
we want this to be interactive. We want this to be informative and we want this to be fun.
Okay. That's the operative word.
We want to focus on the similarities and the differences among the three plan sponsors.
We want to focus on the role of external partners, the manager of managers and most importantly,
we really want to get at your questions. We want you to think about the things that you'd
like to ask any of us as panelists.
I want to take a minute just to kind of frame the discussion around global equities and
emerging managers and speak a little bit from my own perspective at Progress. For 24 years,
we've been working exclusively in this niche of really investing with managers that are
overlooked and under researched and often under utilized that have come to be known
as emerging managers.
Now that's been defined by size, it's been defined by tenure or length of time of a firm,
but what we're really talking about is entrepreneurial investment managers, who are passionate about
success. And so at Progress, we manage about $8.4 billion in assets under management, 65
managers, 90 strategies and so it gives us a certain perspective, if you will.
We're privileged to manage for both CalSTRS and CalPERS and so we appreciate that opportunity.
But why do plan sponsors invest with emerging managers and I think you heard it in the other
panel, but it bears repeating once again.
The first reason is alpha. Net-of-fee excess investment return. That's why these targeted
strategies have been created.
I think the second is diversification. If you think about our industry at about close
to 5,000 registered investment advisors, but about 90% of the assets, several trillions
of dollars are managed by just a handful of firms. So conversely, that means that there
are very few assets managed by roughly 90% of the firms in the industry. So this idea
of diversifying the mix of managers that a plan works with is a good prudent strategy
and one that adds value.
I think the third reason that people invest with emerging managers is diversity. And we
heard it in the prior panel, but, again, it bears repeating that it's not just ethnicity
and gender, but it's diversity of ideas.
And so I think you're going to hear that from the panelists this morning, how particularly
with CalPERS, as they restructure their global equity program, that in terms of what they're
looking for from managers, it's not only investment performance, but insights. Ways of thinking
about the market that can help them to better manage their internal portfolio. That's becoming
a critical success factor.
So this idea of diverse insights around the market, around industries, around various
macroeconomic factors becomes another reason.
And then finally, this idea of capacity. Developing a pipeline of future investment management
firms that a plan can hire directly, come to be known as graduation or direct hire.
So those are the four reasons: Alpha, diversification, diversity and capacity. So that's the framing
by which we wanted to begin our panel.
Now all three of the planned sponsors on our panel have decided to work with an external
partner, a manager of managers if you will, to really serve as an extension of staff and
to really be an outsource specialist, if you will, to help both identify talent, oversee
that talent, actively monitor that emerging talent and also nurture those firms to institutional
quality.
So with that, I'll turn it over to our first panel presentation, Tina Byles Williams.
Tina: Thank you, Thurman. So as I mentioned earlier, we have been privileged to be a strategic
partner of both CalPERS and CalSTRS for a while. The CalSTRS relationship began in 2004
with $150 million and it's close to $600 million. The CalPERS relationship began in 2008 with
an allocation of $100 million and is almost $500 million.
But more important than the growth that we have experienced and both of them have experienced,
is growth and asset opportunity that our managers have experienced. So over the course of the
relationship, we hired 22 managers for CalPERS, 31 for CalSTRS.
At inception in the CalPERS account, the average assets managed by each manager was $639 million.
Today, those managers manage an average of $3.8 billion. For CalSTRS, at inception into
their account, the average assets managed was $542 billion. Today those manager manage
3.5 billion.
So I think what Thurman was talking about, alpha, diversity of ideas, but expansion of
opportunity, I think the numbers speak for themselves in that these allocations have
catalyzed growth among the underlying managers.
What do we do? Our primary role is basically to be a value added strategic partner, along
to meet the objective that Thurman outlined; alpha, strategic insight, et cetera. Typically,
and there's diverse mandates among both CalPERS and CalSTRS, is that we...our goal is to manage
their allocations relative to either market based benchmark or a customized benchmark.
But at the end of the day, the tools with which we do that is to retain entrepreneurial,
that's my term of choice, managers, who have a demonstrable and repeatable investment edge.
And our set of, we think, in addition to that, that express that edge through high conviction
and high active sheer portfolios.
For market based benchmark assignments, we will sort of add an additional component,
where we use market insights or macro insights to tilt the portfolio at the aggregate level
towards country region sectors and factors.
With respect to manager selection, and both relationships have benefited from this, we're
not afraid to be the first institutional dollar. In fact, our experience has been that if you
identify talent early, that is actually the best performance period.
There has to be some talent, but that is the best performance period of the manager. In
fact 25% of the managers were have funded over the years, we have been their first institutional
dollar. Our goal is to move back to 50%.
And then just to wrap up here, what are the things we look for in managers? As I mentioned
earlier, an empirically based edge and more important than that, or as important, it needs
to be systematic in it's implementation so that it's repeatable and we need to see the
organization of the firm allocated in ways. I'm talking about the staff, the trade-in,
et cetera, that optimize and is consistent with whatever the manager's edge is.
Secondly, as I mentioned earlier, we like high conviction. I don't think there's any
point in identifying an entrepreneurial index fund, which is the opposite of high conviction
and so, in our opinion, if you're going to be active, be active. You know, some of the
obvious things, unblemished record of integrity, access to sufficient resources to sustain
your business, institutional quality compliance middle and back office.
And then finally, most entrepreneurial managers are managed through a star system, which we're
fine with because I think most teams have a star anyway, so there's still star systems
at the end of the day. But what we want to see is some kind of systematic way because
we're in a very dynamic world of challenge and, or least review in the assumptions of
the star.
And so we look for a balance of a star and then some kind of disconfirm in person or
system so that the star, in essence, can be challenged. So with that, I'll turn it over
to whoever's next.
Thurman: Nancy.
Nancy: Before I start, there is a seat right here and if you have an empty seat next to
you, maybe you could raise your hand and we could get a few people seated. That's the
only one. Okay. If you kind of want to sit on this little window shelf, you could do
that too. Good. Okay. Thank you.
So, I'm Nancy Calkins and I'm with San Joaquin County. So I thought I'd do a little compare
and contrast. CalPERS. San Joaquin County. Okay. CalPERS, $280 billion. SJCERA is $2.4
billion. Four hundred investment professionals in the investment office, I think about that?
John: That's right.
Nancy: I'm your person at San Joaquin County. CalPERS has, I don't know how many retirement
systems...I know it's 2000 or more, yeah....
John: You stump me.
Nancy: Okay, one thing I do know, Stockton is the county seat of San Joaquin County,
but I only have county employees and CalPERS has the city of Stockton. So CalPERS has a
lot of internal management and external management. We're totally externally managed. And CalPERS
has a specific and identifiable program for diverse and emerging managers. We do not have
a specific program.
But we really, really embrace the manager of managers. Specifically in the small cap
equity area. This is the only active management that we have in U.S. equity, so, and they've
been doing great. We have two firms that work with us. Victor is right here in front, so
if you'll stand up or raise your hand, with Legato. And Capital Prospects, Marilyn. Yeah,
okay. Marilyn. Thank you.
You know, you just heard from FIS here, some great information about how you look in progress
also. Are there some other manager of managers in the audience? Okay. You want to just say
who you are so people can....
Karen: Karen Robins, Leading Edge.
Margaret: Margaret **
Ken: Ken Grossfield from Strategic Investment Group.
Nancy: Great. Thank you. So these are the people that we work with as far as manager
of managers go. We also work with our consultants because we do have a few emerging managers
outside of public equity and they would go through our consultant.
So those are some differences between CalPERS and San Joaquin County, but the important
part is our similarities. And that is that we invest for defined benefit plans that have...governed
by a board and committee structure. We are fiduciaries. We seek the up and coming performance
oriented managers and manager of managers. And we want to allocate strategically to those
emerging firms that have generated the better risk adjusted performance.
We want to find good managers and grow together. And I think this is really important for smaller
funds, like myself, because we're kind of like the...maybe we're the emerging pension...I
don't know.
John: We want some of that.
Nancy: But anyway, I do kind of represent a group of 20 different counties here in California.
There's a group called SACRS that stands for State Association of County Retirement Systems
and there's 20 counties under the 37 Act. So there's 20 of us out there. L.A. County
is the largest one. Their assets equal the sum of all the rest of us, but, you know.
Another group that you might be interested in is CALAPRS, which is the California Association
of Public Retirement Systems and that is a broader group, which includes CalPERS, CalSTRS,
San Francisco, some other folks that...so it's kind of a broader group, but another
group that you might be interested in contacting.
So, how does SJCERA do this? It's different, but we use the manager of managers model.
And we use it in U.S. small cap to replace a single traditional manager. So for us, it
gives us a manager who is doing all those things that you're doing and with emerging
managers, a lot of times, there's business things that are just as important to have
the firm succeed, as well as we were talking about, you know, it's not all about performance.
But so the manager of managers will perform the due diligence, will select the managers,
will determine allocations, construct the portfolio, monitor and it really is great
for us. We like to be strategic partners with all of our managers, but when you think about
it, our manager of managers do what we do. Right? We try to hire managers and monitor
them in compliance and all those kinds of things.
So, outside of public equity, we use our consultants and we talked about this earlier today. We
truly use our consultants as an extension of staff. We actually use them as staff. And
so they screen investment opportunities that might be outside...and actually, they screen
you guys.
We don't have private equity, per se, but we have something called global opportunistic
and we do have some emerging managers in that area as well.
Thurman: Candace.
Candace: You know what I could really say here is "What they said." Because it all applies.
But, I guess where I'll start is just give you an idea about what our program looks like.
We do have distinct, we call it Developing Manager Program at CalSTRS.
And currently, we work with six manager of manager firms, I would say many of which or
maybe all of which are in the room. The program is a little over $2.6 billion under management
at this time with 51 underlying managers, so the managers that have been hired by the
manager of managers firm.
And at this point in time, the global equity portfolio, you know, on any given day is roughly
$95 billion. And so our developing managers program is roughly 3%, a little bit under
3% of the global equity portfolio.
And I guess, when I think of the reasons that we have the program in place, I think Thurman
really hit the nail on the head and spoke to it very eloquently. And Nancy touched on
something that's very important to us. We're looking for, all of our managers, but again,
particularly I think our manager of managers to be partners with us, as an extension of
staff. And we have already learned a lot and hope to continue to learn from our managers
and apply that to the work that we do every single day.
And, again, it goes back to ways of adding alpha to the portfolio. We have a wonderful
constituency that we manage money for, the California teachers, and they count on us
to deliver for them. And so this idea of diversity of thought, bringing unique and thoughtful
ways of addressing the concerns that we have in the portfolio.
And then from the standpoint of our future. So one of the problems that we run into from
time to time, and I'm sure this isn't new to anyone, but the idea that we find great
managers and they have great success and then what happens? The strategy closes. And so
now we've got dollars to allocate and being a large investor, it's very easy for us to
sort of, I call it 'swamp a manager' to need to allocate dollars and the strategy is closed.
So this is working with our developing managers as a way to look to the future to build relationships
with firms that may be just starting out, but that will have tremendous success going
forward and we certainly want to be a part of that and help them grow as we grow our
portfolio and work for our constituency. So, short, but sweet. That's because my compatriots
here kind of, you know, said it so well.
Thurman: Okay. John.
John: And Amen to that. I'm going to be short and sweet as well and echo many of the comments
that have already been touched on. For those who are interested in what's going on in CalPERS,
just about a month ago, we conducted a webinar to go through in some detail, exactly our
plans and those things that are, as we look forward over the next three to six months,
those things that are going to be in place. So I'll touch on a couple of the highlights
of that, but it is on our website and anyone who would like to go through and hear and
see some slides that enumerate that, I invite you to go there directly.
Some of the highlights, though, that are really important and, again, I really do, we learn
from one another. A lot of what you hear will be ditto as we talk today. The questions are
really the important part, so I want to get to it.
But the highlights of our changes have been as follows:
First, we've got a terrific set of advisors. We've mentioned the advisors. Up to now, we
have the five, which include FIS, and Progress, Leading Edge, Legato, and Strategic, all of
whom provide really important extension of the staff, an important role in thinking strategically
about the future direction and the actual implementation of our strategies. And that's
very critical to us.
We are about having....our mantra over the past year has been a focus on the global equity
portfolio and one I say over and over again is that 'All that matters is the return of
the aggregate portfolio.' So really important at the end of the day is what we do for our
constituencies, meaning at the end of the day, the total plan.
And it reverses the way you and we think about one another and the relationship that we have
in so much as it asks, it begs you to put yourself in our shoes and think about what
fits. It's why performance and, particularly Thurman and Tina and Victor and Ken and Clayton
all have heard before, we have a kind of funny line. When a manager comes in and says 'here's
our performance for the last quarter,' my retort is 'I really don't care.'
I really don't even care about the last year. I really care about how that fits in to the
aggregate portfolio and helps us fulfill our mission. So really key to that, and you've
heard it said a couple of different ways today, are thinking about the dimensions that ultimately
lead to a win-win. Win-win meaning that performance at a portfolio level.
And I'll give you our challenge. We have 78 strategies in the global equity portfolio
at CalPERS, $152 billion. What ends up happening is, by default, we become a big index fund.
Everybody is managing to a benchmark. We have 10,541 stocks in the portfolio. And at the
end of the day, what ends up happening is everybody interacts themselves out.
So our growth managers sell to our value managers and vice versa and large to small and when
it's all said and done, we're back at the index. So our task is to be really creative
about that. And emerging managers is an integral way to think about it.
So what we've done is to commit to the idea that it isn't a program, that each mandate
that we have among our emerging managers, as well as across our portfolio, is par to
the total. And therefore it has a role and we don't think about it as a little piece.
So we've gone away from the fund-to-funds concept because each individual strategy added
up to the 78 has an equal opportunity in many dimensions to impact the whole portfolio.
So that's big.
Ten percent of our external assets are managed, are invested within the emerging market world.
It's a little over $3 billion. We are looking to restructure in a way where those are more
material mandates and we're getting out of the business of providing venture capital
to firms.
And I understand that's a really critical and vital role for many. We've just decided
and considered that it's not a skill that we have, nor does it really help at the end
of the day for that big mission of the performance of the aggregate portfolio. I'm going to stop
there, Thurman, and then let's....
Thurman: Well, I'm going to take the moderator's prerogative and ask a couple of questions
and then we're going to open things up for the audience, so please start thinking about
your questions.
What are the one or two strategies that you guys think are of most interest to you now,
but are most difficult for you to source? The one or two strategies that are of most
interest, but are most difficult for you to source?
John: Well one is that we...it came up at the end of the plenary session this morning,
the idea of sustainability. We spend a lot of time thinking about ESG and sustainability
in a broad sense and our goal is not to hire ESG managers. Our goal is to influence how
investors think about sustainability.
So in addition to engaging our own managers about, in their investment process, we look
for thought leaders to help provide leadership in that respect. And how best to integrate
ESG into an investment process. It isn't about doing the right thing in the end. I mean,
in my mind, it's do good to do well. That's the bottom line and that's the way we're thinking
about the issue. So that's one that's challenging. There are a small number of really thoughtful
firms that are out there, but they're hard to find.
Thurman: Anyone else?
Tina: I can say, we've been focused on areas where, I mean, where you can generate what
I would call exotic beta that diversifies from the index-like exposure you have, but
that has lots of stock dispersion so that there's an opportunity to add alpha. But that
they're hard to find. And so one...the area that comes to mind that sort of merges all
those other thoughts are frontier markets.
And so there are certainly frontier funds around, but if you buy one of the big available
funds, you get, in essence, an oil fund because it's dominated by the GC countries. If you
exclude them, you get a Nigerian financial fund because that's the nature of the concentration
and so we've been...
When I sound sleep-deprived, it's because I just came Africa sourcing managers. We've
been trying to look for regional specialists in those various markets and it's...you can't
turn on investor force and find them, you actually have to go there and find them and
so we think..so that's been difficult, but I think rewarding.
Thurman: Nancy? Candace? Strategies most interesting, but are difficult for you to source.
Nancy: I would say that private equity might fall in that area for us because we're really
late to the game and so we actually don't have an allocation to private equity, but
we actually hired a couple of emerging firms. They came from out of someplace else. It was
through our regular process to identify managers, but I think private equity is one that's hard
if you haven't been in there forever, with, you know, to find those top...
Candace: Thurman, I think I'll answer it in a little bit different way. I think one of
the things that we're thinking about is where do emerging managers really have the most
capability and the most promise from the standpoint of adding alpha and diverse thought to our
portfolio.
So in other words, you know, is it small cap U.S.? Is it emerging markets? Is it developed
non-U.S.? So where do these managers really have the most opportunity in an actively managed
portfolio to bring this capability to us?
I'll echo something that Nancy said, you know, we don't have time to be experts in all things
all of the time and so we really lean on our manager of managers to help us think about
this. But, again, ways, thoughtful ways of approaching this to really focus this area
of the portfolio in the most promising arena, if you will, if that makes sense.
Thurman: One of the issues that came up at the plenary, and I'll just ask you guys, I
know it's a work in progress with all of the plans and perhaps, Nancy, you can also comment
on it, is this idea of direct hire. And John, in particular, given how you're thinking about
reshaping the CalPERS global equity portfolio, how are you beginning to think about direct
hire. How do you think that will evolve and what kinds of characteristics, in terms of
firms....what should the firm do to really demonstrate their capability for direct hire?
John: In reality, a direct hire is partially dependent upon size and capacity in so much
as in order to really move the needle and allow us to make a bet, to have an exposure
that we seek, then you have to have enough capacity in order to deal with that. So there's
just no denying that getting bigger is a good thing at that level.
We're going through it right now. In fact, we've reviewed about eight or nine managers
who have been in the emerging managers program. We're expecting...we're using, I like Chris'
term, transitioning.
We're transitioning probably at least six of those managers and so we're going to demonstrate
success in the sense that these were managers who started small, grew, were successful,
grew into a position where they could be part of the larger allocation and that's really
what it comes down to.
But the characteristics, and I'll be specific....Victor's challenge, be specific, is the characteristics
that I think are really critical are around the balance of growing a firm and also providing
a specific benefit or insight. That becomes a challenge and that's kind of middle-aged,
between emerging or developing managers and developed managers.
Infrastructure and the key of having the baseline capability is also really critical. And firms
need to have a plan in place that evolves over time. Many times, ownership transition
is a very critical aspect of a firm's ability to find its way through the normal life cycle.
And then, I think the other part is the development within the firm. You know, the references
earlier today to process and philosophy we share as really integral, all of our advisors
and the CalPERS to our assessment, but that's not a static analysis or point. And the firms
that are successful are those who have been able to migrate up the life cycle curve.
Thurman: Anyone else? Candace.
Candace: One of the things that we're really focused on, particularly for this year and
the coming year, is our I'll call it transition program. So that one of the real mandates
that we have for our program to be successful is for our managers to be able to sort of
work their way to a direct mandate with CalSTRS.
And so we've been working very, very closely with our colleagues and our manager of managers
to develop a process for us to be able to work directly with managers who have been
successful. What better place can we go? These managers are already managing money for us
and so we'd love to be able to find a way to work them into we call our core portfolio.
And one of the challenges that we face, and I'm sure John would agree, is that we have
a procurement process through the State that can take...
John: Agonizing.
Candace: ...I was trying to be PC here, John...that can take a very long time, which affects our
ability to be nimble, if you will. And so working with our procurement process is a
challenge and we, again, are leaning hard our manager of managers to help us.
And the way we're thinking about this is that we sort of sit down with our manager of managers
firms and look for each of them to recommend managers who are potentially ready to transition
out of the developing manager program and ready to take on a direct institutional mandate.
And we think that we'll have that process in place in fairly short order. And I would
echo, again, some of the things that John said. Performance, obviously on a longer term,
medium to long-term basis, is extremely important. We're looking for consistent performers, trying
to truncate the downside and, of course, have that really, really good consistent performance.
But additionally, philosophy is extremely important to us. We want to be sure that firms
have a good fit with the CalSTRS philosophy, that fit within the overall core portfolio.
We are looking for, again, managers to be very strategic partners with us, an extension
of staff. All of these things are extremely important. A repeatable process, something
that can be articulated by the firm. Structure of the firm is incredibly important.
And so, again, I'm echoing things that others have already said, but again, fit is extremely
important to us, as we look to move these managers from our manager of managers relationships
into a direct mandate with CalSTRS.
Thurman: Great. Now, let's have fun. Questions from the audience. We've been having fun.
We'll have more fun. So we've got mics, I think. This is being recorded, so I'll ask
you to stand, state your name and then state your question.
Q&A:
James: James Francis, Paradigm Asset Management. This is for CalSTRS. Chris mentioned something
about the innovation initiative that I was hoping you could elaborate on that and how
within the scope that the equities fall into that and what kind of strategies and how emerging
managers are able to connect with that program outside of your manager of managers program.
Candace: I will give you my best shot. I have colleagues in the room that may be able to
speak better to it, so I'm going to ask all of you, if I stumble here, to, you know, catch
me.
The innovation area really is that. I would almost call it an incubator, if you will,
for fresh new ideas. And by its definition, it really isn't focused on a specific asset
class, per se, probably more focused on areas that might cross over and sort of fall between
the distinct asset classes, if you will. And so really almost any kind of strategy could
be looked at in that framework.
Now whether that will fit within our portfolio, we don't know, but it's really their job,
this teams' job to look at the strategy, look across our entire portfolio and see if it
make sense, either from a risk reduction standpoint or an alpha enhancing standpoint. And that
is the extent of my knowledge on the innovation team. Does anybody else at CalSTRS want to
add to that at all?
Man from CalSTRS: I think you covered it, but it's not just new types of strategies.
It's new to CalSTRS, like hedge funds for example. I think we just have a global macro.
But in addition, we're looking at new, other types of strategies. The person to contact
is Steven Tong. He's the head of innovation.
Thurman: Another question.
James: Are there any..and I don't know which one can answer it better. Are there minimums,
are there size, are there... you know, because innovation often times, I think, you know,
we want to be at the forefront of what's going on in industry and a lot of times the programs
that are put together are for kind of yesterday's asset classes.
Man from CalSTRS: For the today's asset classes, you know, for like global equity, fixed income,
there's set ranges. You know, like minimum assets and maximum. For innovation, there
is not. It's a work in progress right now to finding that.
Candace: And I can tell you, just quickly, on the global equity side, from the standpoint
of the way we think about emerging managers, we have decided that we really want to take
a flexible approach. We don't want to have hard and fast cutoff.
So to be, let's say eligible for our emerging manager program, there really isn't a minimum,
per se. There's no minimum track record. There's really not a minimum assets under requirement,
and to be funded as an emerging manager, the firm needs to manage less than $2 billion
at the time of funding. So, in other words, when the firm reaches
$2 billion, we don't automatically say, 'Okay, that's it. You're done.' We want to see continued
success, if you will, with our programs. I don't know if that speaks a little bit to
the question of sort of minimums and maximums from the standpoint of global equity.
As Chris said this morning, those minimums and maximums, if you will, vary by asset class,
but for global equity that's the ticket.
Thurman: Questions.
Hugh: Good morning. My name is Hugh Harley. I'm from a company called Petfin in Brazil.
I have one question for maybe Thurman and Tina, but it's open. Whenever you are, you
know, facing a manager, such as ourselves from Brazil and you're looking at that part
of the developing world, would you prefer to go the more regional approach or would
you hire country-specific managers?
Thurman: I guess I'll start. I mean, we certainly like regional, as well as country-specific,
but it really depends on your expertise. Again, Tina said something earlier I think is very,
very critical is that what is your edge, what is your expertise. So is it in a country or
is it in a region?
We do have non-U.S. portfolios, where we have included in the past. We don't have any right
now, country-specific or regional-specific mandates, but it really just depends on your
expertise.
Tina: Ditto. But just one thing. As I said, for particularly....look, I'm from a frontier
country and the dynamics, the lens with which one by securities from a developed standpoint
don't work. So, we actually are aggressively actively seeking regional specialists that
understand the governance standards, et cetera, of that particular market. So, please give
me your card.
Thurman: We are sourcing emerging firms that are located outside the United States, and
so we think in the future, as you begin to think about this kind setup of emerging managers,
that it has to have a global context.
John: And, Thurman, I might add to that that from, particularly the large, a large fund
is faced with the issue of allocation. That's the most important thing we do at the end
of the day, is capital allocation. And I submit to you that there is no emerging markets anymore,
that it's an old mal passé, but still accepted term and description.
And from an investment perspective, we don't want to think about the world in a way that
is truly heterogeneous. So company or country-specific, common factor specific, and characteristic-specific,
I think, are where everybody ought to be going and I urge all of you who have, who think
about how to describe yourself, to think about it that way because I think that's where,
to use the Wayne Gretzke analogy, that's where the puck's going.
Thurman: Victor.
Victor: Just one thing to see if I can get agreement from all of you on is that no one's
terribly interested in a manager that hears one of you say, 'This is what we're doing'
and that manager trying to transform to fit what you're doing as opposed to having a specific
expertise.
I know we've run into that, where a manager will say 'we're a hedge fund, but I can be
something else for you' and then I can be something else later. And that's kind of a
non-starter for us and just if you all are in agreement, probably a good message to send
out.
Thurman: Thank you. Other questions?
John Schwartz: Hi. John Schwartz from Redwood Investments in Massachusetts and my question
to you would be in terms of the trends, what are you seeing and as a manager of managers,
what are you advocating versus the U.S. non-U.S. mix of business?
Thurman: I'll let my colleague start there.
Tina: So, I think that there is, I think it's 18 years when I started this business. The
entrepreneurial space was, in essence, exclusively a U.S. idea. That has dramatically changed
and I think for the better. I mean, if you thin....the last public published searches
all were, by planet sponsors, all were either exclusively non-U.S. or had a non-U.S. component.
Or if you just look at the mix of our assets, five years ago, it was entirely domestic.
Now the majority is global. So that gives you a sense as to where there is interest.
So that's one major trend, which I think is a good and a healthy one.
The other one that we're seeing, and there are lots of studies that speak to this, is
it is harder today to form an investment management firm. One of the unintended consequences of
more expansive regulation is that it has geometrically increased the cost of forming or operating
an investment management firm.
And so the other not so positive trend, frankly, we're seeing is that those groups that have
had traditionally and currently have the least amount of access to capital, meaning specifically,
African-Americans, Latinos, to some extent, women, we're seeing relative to 18 years ago
versus today, we're seeing fewer freshenings.
And so I think in one sense that the opportunities are expanding. In another sense, in terms
of that diversity objective, the opportunities are diminishing in some ways.
Some of you may know...our sort of fight against that, if you will. We started this ecosystem,
which tries to address both aspects of that, where we identified eight private capital
providers, to whom we can give warm introductions to talented folks that don't have the capital.
In addition, to which we negotiated bulk discount purchasing agreements with five vendors that
provide compliance, services, trading platforms, data services, marketing services. An average
discount is about 26% and we call it the ecosystem. And so to try and address kind of both ends
of that operating capital structure.
Thurman: Well, certainly one of the head wins against U.S. equity management is just the
whole active versus passive kind of issue. And increasingly, we see change in asset allocations
from planet sponsors from our clients, reducing commitments to U.S. equity. And so non-U.S.
equity, therefore, it becomes a much more attractive place, so that definitely is a
place where you see more activity, more searches.
Global equity would be the other. But tremendous, still tremendous opportunity for emerging
managers. And that's the message we want to leave you with. We've got time for one or
two more questions.
Margaret: Hi. I've got a quick one. So related to the CalPERS transitioning effort...This
is Margaret Jidalah from Vivian by the way....we're not one of your external advisors. You have
five. To what extent are you refreshing that pool? And if so, what's the best way to communicate
with you?
Thurman: Okay. That's a specific question.
John: No comment. No, actually we spent a lot of time getting to...I spent a lot of
time getting to know our advisors in the last couple of years and we made the proactive
decision that they both provide a tremendous asset to CalPERS, as well as a very complementary
skill set to bring to BEAR, so it's a quite current and quite conscious decision, the
five that we've engaged and at least for the, I'm going to say the next several years or
couple of years, it's unlikely that we'll make changes.
Thurman: Yes?
Janeen: Hello. I'm Janeen Miola with Fair Point Capital in Chicago. And we are a majority
female owned firm. We opened our doors in 2011, a little bit different than an emerging
manager because we were a result of our portfolio management team lifting out from a predecessor
firm. So we were able to take our 15-year track record and our assets, which were $4
billion at the time. What's deceiving is the majority is with one client, a sub-advised
mutual fund, $3 billion of that. So we get knocked out as an emerging manager because
of our asset size, but we don't have a lot of institutional. Any suggestions?
Thurman: You know, this issue of definitions and ceilings and constraints really works
against kind of why these targeted strategies were created in the first place, and that's
to find good talent and to create opportunity.
So I would just urge you, one, in the state of Illinois, the definition, the statutory
definition of emerging managers is up to $10 billion and includes minority and women led
firms. And so, I would encourage you to focus on Illinois, and that's not to put you off
in California, I'm just saying to focus on Illinois.
I think the other thing is just to really find those kinds of thoughtful institutional
investors, who will look at your situation on a case-by-case basis and make your case.
The fact that who you are, the fact of the circumstances around your anchor investor
and more importantly, the opportunity that you represent.
John: I'll second that. And we referred to it earlier, but frankly, you're in the position
now where you have to go through the traditional process, which means ultimately, for us, I'm
going to say minimum of six months and more likely closer to a year to hire a manager
in a specific area outside of where we...our emerging managers program, which just makes
it all the more difficult. And I'll be candid with it. For us 78, we're unlikely with 78
strategies to be going up. In fact, we have to do what's obvious and rationalize. So it's
a tough playing field around it. You're going to have to kind of pick your spots.
Thurman: One final question. One burning question.
Josephine: I have a burning question.
Thurman: Okay.
Josephine: I'm Josephine Jimenez of Victoria 1522 Investments, a company that specializes
in emerging markets. My question is this to all the panelists. Since it has become very
important in today's global environment to be able to add value, that is contribute insight
to our clients, how important is it to each of you to consider, perhaps, sector funds.
For instance, we're positive on the materials industry from a global perspective and will
that be something that your firms might consider in order to be able to tilt your perspective
portfolios if you're convinced that our insight will add value?
Thurman: Well, John, I'm going to let you answer this question because this is, in fact,
what we were trying to create with a new transition in global equity.
John: Absolutely. Josephine, to me it's no different than the question of whether investing
regionally is more important or makes more sense. So, Amen.
Thurman: Okay, well with that, we're going to close. Please join me in thanking our panelists.