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>> Mike Silva: Welcome and thank you for participating in the Global Equity Emerging Manager Restructure
Webinar. Speakers in today's webinar include John Cole and Melissa Paminto from our Global
Equity Asset Class. My name is Mike Silva and I'm with the Targeted Investment Programs
at CalPERS. Our team oversees investment programs designed to have positive impacts on the investment
returns at CalPERS. These programs include Emerging Manager programs, Diversity and Inclusion
initiatives, California Investment initiatives, Labor Relation policies and Sustainable Policies
and Real Assets.
CalPERS has a legacy of leadership and innovation in emerging manager investment strategies.
We have been investing directly with emerging managers for more than 20 years. We remain
committed to engaging with our stakeholder community and seek the strength and relationships
with emerging managers, as well as improved implementation of emerging manager investment
strategies.
As of June 30, 2013, CalPERS had nearly $12 billion of assets under management with approximately
395 emerging managers. In 2012, as part of our Emerging Manager Programs, CalPERS created
the Emerging Manager Five-year Plan, which serves to describe and guide our efforts in
emerging manager investing. Our year one annual progress report will be submitted to the legislature
March 1st and can soon be found on line at www.CalPERS.ca.gov.
The five-year plan has 10 work streams, six focused on portfolio management and four focused
on external outreach. Today, we'll cover one of the work streams under portfolio management
as we host this webinar regarding our emerging manager programs in global equity.
Here to discuss the restructure is John Cole, a Senior Portfolio Manager in Global Equity.
John, you have the floor.
>> John Cole: Thank you, Mike. Let me add my welcome. This is truly a Global's webinar
and so for some, it's morning, some afternoon and some evening. We appreciate you joining
us. The purpose of this webinar is to provide a better understanding on the Global Equity
Restructure and its objectives. We'll discuss the purpose, expected changes and the outcomes
of the restructure with time reserved for Q&A at the end of this webinar.
As introduced, I am John Cole, Senior Portfolio Manager of Global Equity at CalPERS. With
me today also is Melissa Paminto. She works closely with our five advisors, who serve
as critical partners in our focus on emerging managers. Those advisors include FIS, located
in Philadelphia, Leading Edge, Legato and Progress, all located in San Francisco and
Strategic Investment Group, located in Arlington, Virginia.
This past year, CalPERS has worked in conjunction with our external advisors to prepare for
a restructure of the global equity emerging managers program, resulting in a more focused
commitment to emerging managers. This restructuring is intended to better leverage the skills
and resources of CalPERS advisors in identifying, selecting and creating more meaningful relationships
with high potential, long-only public equity emerging managers. That is, firms with assets
under management under 2 billion dollars.
This evolution will encourage emerging managers to be 1) better aligned with the global, with
CalPERS overall investment strategy for global equity, 2) in closer contact with CalPERS
staff and 3) better position to compete for and garner direct investments in the future.
To provide a better understanding of the restructuring currently taking place in our Emerging Manager
program, I'll discuss how the program was previously organized and where we intend for
it to go. Global Equity represents about half of CalPERS total portfolio, which translates
to approximately $150 billion today. This amount will likely decrease due to recent
actions taken by the Board regarding the overall plan strategic allocations by asset class.
Of that $150 billion currently allocated to global equity, around 80% is managed internally
and mostly index oriented. In the past, the remainder was typically carved out and set
into discreet programs, including activist managers, emerging managers, traditional managers
separated by region and model-driven active portfolios. We have nearly 80 separate portfolios
in total.
We've taken a fresh look at how best to provide active management, as well as provide a value
added approach with this $150 billion in global equity and concluded that managing separate
specific programs in isolation was counterproductive and could often detract value from the total
portfolio, as managers and strategies often offset one another.
One conclusion that we also arrived is that CalPERS recognizes the advantages Emerging
Managers possess specifically and, thus, feels confident in maintaining its commitment to
Emerging Managers, hence the resulting allocation from the restructure will be $3 billion, which
represents more than 10% of the externally managed assets.
As previously mentioned, the restructuring of the Emerging Manager Program evolved from
the reevaluation of the total Global Equity Portfolio and how best to manage from a holistic
view. We concluded that size was both our biggest advantage and disadvantage. Our large
portfolio allows us to access broad market information and ideas that allow us to manage
the aggregate portfolio from the top down. That's the pro. That doesn't substitute for
our portfolio construction task of building the overall portfolio, strategy by strategy.
However, we also acknowledged that our size is our largest challenge, as it is difficult
for us to move the portfolio in a tactical or any short-term fashion. At the aggregate
level, we own 10,541 stocks, looking much like a giant index fund. But the portfolio
that consists of a large pool of managers and capital, often one affect cancels out
another. Traditionally, we've hired managers to perform relative to a strategy benchmark,
with the expectation that the managers can beat those benchmarks and as a result, we
will be our overall policy benchmark, which is the FTSE All-World, All-Cap index in aggregate.
Recognizing that individual managers' specific relative performance is not the most important
thing in getting to that objective, as it is often cancelled out by other strategies,
we have turned our focus to what is the most important thing for Global Equity, to manage
the portfolio in the aggregate and not in individual pieces. This impacts all of our
investment strategies and portfolios, not just emerging managers.
One real value added opportunity for CalPERS is access to intellectual insights that our
managers can bring. By helping us identify mispricing and anomalies in capital market,
which we might exploit to better manage the portfolio holistically. Rather than having
a large number of small mandates working independently, and having little or no interaction with CalPERS,
we want each of our portfolios to be more meaningful, impactful and aligned with the
total portfolio.
All firms can have valuable systematic or strategic insights and emerging managers particularly,
often have a unique skill or expertise that CalPERS can leverage. The same is true, by
the way, for our five advisors, FIS, Leading Edge, Legato, Progress, and Strategic. Each
is complimentary to one another.
As Mike pointed out earlier, CalPERS has been in the forefront of the emerging manager space
for 20 years. The restructuring in global equity reaffirms our commitment and is consistent
with our mission and objectives for the Emerging Manager program: Identify small managers with
potential for success. Access unique investment opportunities that may be overlooked, and
cultivate the next generation of external investment management firms.
One prerequisite - we do require institutional quality managers that employ solid practices
in the areas of compliance, training capability, marketing, infrastructure, sustainability,
planning and strategy. By working with talented firms, we hope to further leverage the relationship,
accessing their unique insights, their top management and capital allocation perspectives.
The restructure in global equity, as described, aligns with the CalPERS objectives for emerging
managers as outlined in its five-year plan, pathway to the future, also mentioned by Mike.
These objectives are to 1) continue our commitment to engage with the emerging manager community,
and 2) strengthen relationships with emerging managers, who can contribute to the performance
of global equity's total portfolio.
As part of the restructuring, our advisors will be measured on their contributions in
four key areas: Manager selection and due diligence, input on capital allocation and
identification of investment insights, performance, evaluation and analytics, and Communication
and outreach with the emerging manager community.
Managers will be selected and judged based upon the following:
1) Fit of the investment philosophy and process with specific CalPERS needs.
2) Articulation of investment insights beyond stock selection.
3) Consistency of systematic biases within their portfolio
and philosophy. 4) Performance as a validation of the three
criteria that I just mentioned.
So in summary, our emerging manager assets will be more than $3 billion, split relatively
equally among our five advisors with the total number of relationships decreasing slightly.
Although the number of relationships declines, the average mandate increases, along with
the aggregate commitment.
Our timeline: First our plan was presented and discussed with CalPERS Investment Committee
at the board on October 14, 2013 in open session. We continue working closely with the advisors
to determine which emerging managers fall into what category, the categories being 1)
remaining in the program, 2) transitioning to a direct relationship with CalPERS or 3)
being a new emerging manager candidate.
Communicating with managers has begun informally and is expected to continue over the next
couple of months. We're targeting the end of the second quarter, that's June 30th at
2014, to complete the transition from the existing platform to the new manager structure.
Our restructuring plan offers these key advantages to our Emerging Manager Program, among others:
Better our continued commitment, better alignment, closer contact, better position and larger
mandates.
Now, we will answer questions that you have. First, I'll note that the advisors contact
information is available on your screen now and also on the Resource button, pointed out
earlier, so you can print that PDF. With that, I'll turn to some questions and look forward
to those being submitted.
Q: The first question that I got is: Will there be a minimum or maximum asset level
for emerging managers?
A: Importantly, in order to meet the prerequisite that I discussed earlier, we want to be, we
insist on being no more than 25% of the firm assets under management or qualified emerging
managers, again those being total firm assets under $2 billion.
Q: Will CalPERS take ownership stakes in emerging managers?
A: No, we will...we have in the past and we will develop individual extra strategies,
where such relationships exist. In the future, we do not intend to have direct ownership
positions in managers. We will, on an individual basis, again to the past, in contrast to the
past, consider both performance fees and revenue sharing arrangements as options in developing
a relationship.
Q: How does the CalPERS IPTS, which is the Investment Proposal Tracking System figure
into the program?
A: The investment proposal tracking system is a mechanism by which all managers, all
vendors, who do business with CalPERS have the opportunities to submit in an objective
and transparent way, their proposal. We are committed to that structure and within the
Emerging Manager program, all emerging manager candidates will be required to file through
what we call IPTS, investment proposal tracking system, in addition to any requirements advisors
may have for working or consider managers.
Q: Why isn't performance the primary measure of success?
A: I want to reiterate what really matters is CalPERS overall investment performance.
That's our mission and our job and what we want to do is make sure that the role of all
of our portfolios, but specifically the emerging managers, is set up in a way that supports
that overall objective. So performance is one area that indicates how a manager looks
at the world and their likelihood of investment insight and it's valuable for us to understand,
but the reality is that the most important measure of all is our performance at the aggregate
portfolio level against the FTSE all-world, all-cap index.
I mentioned fit earlier. What does fit with CalPERS overall portfolio mean? Well, it means
that we're looking for relationships that will help provide us with information or systematic
exposures that are useful to the overall portfolio, systematic exposures meaning a manager who
is predictable in the factors or style or area of their expertise so that we can, with
confidence, know what they will deliver over time. And the skills that are helpful to allocation
decisions are those things that help us understand what factors, anomalies and mispricings may
exist in the capital markets that we can exploit at the total plan level. So, we're looking
for specialized exposure. We are not looking for broad diversification. With 10,541 stocks,
we have plenty of diversification in the total portfolio, so what we want are the opportunities
to add value at the margins.
Q: Please give some examples of investment insight and how it will be measured.
A: Important. That's a great question. And important to note here is that one of the
things that is critical to our success, CalPERS success, is to leverage those strengths. We
talked about size being one strength. Another one is that we have the opportunity to have
a longer investment horizon than most investors. So, the idea of investment insight, unlike
many plans, which focus on quarterly and annual returns, we're looking for the opportunity
to find investment ideas that play out over longer periods, one to three years because,
1) we can position our large portfolio to take advantage of it and 2) we have the staying
power in order to reap the benefit of having a longer term perspective in a world that
is more short-term focused. So the time horizon is important.
Investment insights can be an area as specific as a country, take for example, Japan. Many
changes have occurred in the monetary and fiscal side of the Japan economy, are very
much in motion, very going much going to affect Japan over a longer period greater than one
year and the types of insights that we're looking for are those that help us position
over the one to three year period that are broader than the headlines of the moment or
the concern over the next quarter.
Another example might be in an area like quality. Understanding how to measure quality when
it is attractively priced in certain market places. A third example is in the broad area
of sustainability. ESG is an area that we're committed to, broadly at CalPERS has a basic
value and we're looking for the kind of expertise by which we can add value through insights
from our managers, who are focused on ESG.
Q: The last question I've got, and then Melissa, I think, has collected some more, is that
we have: What may lead to a direct relationship with CalPERS?
A: Again, usually a direct relationship will happen after the assets under management of
the firm have exceeded $2 billion. Importantly, it will occur when there's been demonstrated
value in terms of fit, as I described earlier. Also importantly, that the portfolio occupies
a complimentary position to our existing portfolios. And also important is that we have a relationship
that is collaborative in its attitude in order to meet our unique needs in working with the
manager together with the advisors I might note.
And finally, I'll note that we want to have the confidence in a proven business model
of sustainability. I noted earlier, the facets of institutional quality, the bar gets raised
a little higher in the direct relationship, which leads to higher assets under management.
Let's see what else we've received. I can pause here for just a moment.
>> Melissa: Alright, thank you John. We've had quite a few more questions come in. So,
let's start with the first one. Will you continue to use U.S. domicile-only managers or will
you move to global managers as well?
>> John: We have historically focused on U.S. domicile managers, but we do not want to preclude
the opportunity to have non-US based managers within the emerging managers program, so that's
open.
>> Melissa: Next question, you mentioned that there will be fewer managers. Can you quantify
slightly when you say there'll be a reduction in the amount of managers used? So will this
mean fewer opportunities?
>> Johan: I think the key to this is that our focus here is to be two things, in response
to that one, one is that it is....what we're doing is fluid and that means it will evolve
over time. And that will create opportunities in the future. When I talk about a modest
reduction in the number, I'm talking about a number of maybe around 30, whereas today
that number is in total 33. So it is truly a modest difference and those are estimates,
by the way. They will depend upon the decisions made by the advisors. But most importantly
is that the relationships that we have will be more important to all the parties involved.
They'll be more meaningful, impactful to CalPERS and to each individual emerging managers and
we think that's in everyone's best interest.
>> Melissa: Kind of in line with trying to make more meaningful relationships, under
this new structure, could a manager be selected for more than one CalPERS advisor?
>> John: The short answer is no. What we want to do is take advantage of the strength of
advisors, so one of the things we will do is coordinate among the advisors to make sure
that we're opening up as many different opportunities as possible and will not look or try to avoid
any doubling up.
>> Melissa: With regards to the advisors, will all the managers of managers have the
same benchmark?
>> John: Say that once more?
>> Meliisa: Will all the manager of managers have the same benchmark?
>> John: The advisors. If that question is truly focused at the advisors, they will no
longer be looked at as an aggregator of managers. So the benchmark for each individual advisor
will be each individual portfolio. And they won't be a composite. And we're not looking
for them to provide a mini portfolio. So there will be no benchmark at the advisor aggregate
level, only at the manager level.
>> Melissa: Is CalPERS open to considering global equity strategies that employ ETS in
a major way?
>> John: I'm going to defer that question because my initial response would be probably
not, but I want to think through and discuss with the advisors the implications of that.
>> Melissa: We have two questions that are kind of related and have been, I think, addressed
a little in the presentation, but maybe a little more specific. One is...Do you have
a minimum assets under management requirement for a manager? And is there a minimum investment
you will make in an individual manager? Or do we have a minimum amount that we need to
invest in the manager?
>> John: The minimum amount being the size of the portfolio. We have not set a hard number
and this is something that we're collaborating with the advisors. Our target is that these
relationships be meaningful. I want to reiterate that. And meaningful means that a number that
probably, if I were to give a soft number and that's what maybe I'll do, a soft number
of certainly somewhere around $75 million or the CalPERS mandate would be a size that
we would want in order to be impactful. But again, in consultation with the advisors,
we'd look at facts and circumstances. We really would like these to be meaningful for everyone.
>> Melissa: With a new structure, what is the most important role of the advisors or
the partners?
>> John: There are several really key roles of the advisors. One, they are serving as
partners, truly as partners with us. We are learning from them because of their special
skills and expertise in certain areas, where they have developed their business capabilities.
Their most important role is ultimately the delegated authority. We are asking and depending
upon them, holding them responsible for making decisions on our behalf that are going to
make this program work and importantly at the same time, work in the aggregate portfolio
for CalPERS. So the real onus and, I think, opportunity of a relationship going forward
is putting a real premium on communication. And that ends up being three-way communication
between CalPERS, each individual advisors and the emerging managers underlying each
relationship.
>> Melissa: Do you envision more turnover in managers? And will you be increasing the
opportunities for managers who manage international or global strategies opposed to U.S. strategies?
>> John: I don't antic....actually, the answer is, in terms of turnover of managers, I think
our view is that we want it to be natural, which means to the extent that there is activity,
one great activity would be emerging managers to be successful, grow in size, no longer
be emerging managers and find themselves in a direct relationship in our portfolio or
elsewhere. That's great. We're not looking to manage turnover per se, but it will be
healthy and we expect that as the needs of the overall CalPERS portfolio change over
time, that we'll want to be fluid in identifying those gaps that we'll be looking to fill with
the advisors help within the emerging manager program. So exactly how that evolves will
be dependent really upon the opportunities and the needs of the portfolio in total.
>> Melissa: What does more contact with CalPERS staff mean?
>> John: In the past, we've had relationships, particularly in our fund-to-fund structure,
where there has been sometimes little or no direct communication between CalPERS staff
and the emerging manager. What this structure contemplates is that there will be a three-way
communication and interaction. The advisors will be the primary point of contact. We will
avoid, in fact, we will insist upon no [inaudible], for lack of a better term, end around communication.
So the idea is that all three participants that will make the program successful have
a good understanding of what goes on.
What's that translate into? We have a cycle quarterly, where the CalPERS staff and Melissa
has a partner who works with her on the emerging managers area, will review each and every
emerging manager in detail with the advisor and also on a more frequent basis, either
participate in due diligence or monitoring calls or visit with managers. So the whole
idea is to have everybody more informed so the communication is hyped. But again, through
using the advisors as the primary conduit.
>> Melissa: As a result of the restructure, will CalPERS have any focus with regards to
particular sub-asset classes or a particular type of manager, such as fundamental versus
quantitative or is the system open to all global equity strategies at this time?
>> John: Yeah, I'm glad that's asked, that question was asked. We have no bias or....about
quantitative or fundamental managers. What we are looking for are managers who inform,
long-term capital allocation decisions, who have systematic biases that can be exploited
and that can come from any porter among the investment manager universe. So, we're looking
for creativity and being eclectic is not bad thing, being specialized is not a bad thing.
Maybe the only bad thing, and bad is the wrong word, but, as I said earlier, what we don't
need is more diversification, per se.
>> Melissa: There was mention of a $3 billion target to emerging managers. What was the
previous target?
>> John: We never had a target. What we've done is to manage....and the reason, frankly,
and this last year has been a great illustration, is that market movement explains dollar amounts.
And two things happen. We make asset allocation shifts across asset classes. The market moves.
It goes up. It goes down. So the dollar amount associated with whatever portfolio we have,
across the $150 billion ebbs and flows.
What we've done is establish kind of a threshold level for our advisors to make sure that we've
got the kind of broad exposure across emerging managers that's meaningful, and I mentioned
10% of our external managers, in our view, is meaningful. So that number will kind of
ebb and flow. But it's the beginning point if you think about it. It's the marking point
for the market as we have it today. But we won't peg it. It's not like we'll add or subtract
to it just because market values go up or down.
>> Melissa: You mentioned CalPERS will no longer be taking ownership stakes in emerging
managers. What will happen to those firms that are currently in the program?
>> John: We will take a very thoughtful and individual approach to each firm, where we
have a relationship. And what that means is that together with the manager and the advisors
involved, we will assess the situation and figure out what is an appropriate exit strategy.
And that can range from coming up with an amount that we think is fair for our estate
to be bought out. It can be converted into another way to exercise the value of our investment
and it can be something that could be....play out over a number of quarters or even years.
But the point of it is to be both sensitive to the relationship that we've established
and also to make a good and fair business decision.
>> Melissa: We had a question with regard to if the slides will be available after the
webinar, as well as an e-mail address for progress. I don't believe we'll be providing
the slides, but we will have information on our web with regards to information about
the program, as well as answers to any questions that were asked or any that we didn't have
a chance to address, and that will also include all of the contact information for all five
advisors and that will be sent to everyone who was registered to the webinar.
>> John: So, with that, I'm going to thank you for your participation. We all join in
wishing you a terrific rest of the day. Emerging Managers Global Equity Restructure