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Iowa Pension Puts Managers on Chopping Block

The $31 billion retirement fund is seeking to overhaul its public markets portfolio to produce more alpha.

The Iowa Public Employees’ Retirement System is putting its active managers on the chopping block.

The $31 billion retirement fund will open up its entire public markets portfolio to new managers in an all-strategies-welcome bidding process, where existing managers will have to compete against new applicants to keep their spots, according to Sriram Lakshminarayanan, chief risk officer at Iowa PERS. The goal is not to swap out active for passive, but to cut the managers that aren’t active enough.

“We’re not satisfied with the amount of active risk our current managers put on the table,” said Lakshminarayanan. “We have a lot of active managers that closely track their benchmark – they really don’t put any risk on the table.”

As a result, the Iowa pension fund has consistently invested below its “longtime active risk target” of 100 basis points, according to Lakshminarayanan. Currently, its portfolio only has about 25 to 30 basis points of so-called active risk, which is the amount of actively managed bets the fund is taking relative to a passive benchmark.

To remedy this problem, he said the pension fund will next week begin a search for managers that have demonstrated persistent alpha and low correlation to both equity markets and other managers within Iowa PERS’ portfolio. A request for proposal outlining the search will be published Monday on the fund’s website.

Both the search and the selection process will represent a marked change from how public pension funds, including Iowa PERS, have traditionally chosen asset managers.

“Traditionally public pensions run a very siloed search – let’s say they are looking for large-cap growth equity managers, for example,” said Lakshminarayanan. “Maybe twenty managers apply, and they end up hiring whoever comes up on the investment consultant’s shortlisted five.”

Rather than target a specific strategy, Lakshminarayanan said Iowa PERS will invite any public market manager that can meet their alpha requirements to apply. These requirements will include a track record of alpha — likely a minimum of seven years — and a ban on structures like hedge funds and funds-of-funds which would require Iowa PERS to give up custody of assets, according to Lakshminarayanan.

“Right now, we want to know what else is available,” he said. “Whoever’s got the alpha and is willing to run against our benchmarks is open to apply.”

[II Deep Dive: More Active Managers Are Beating Passive Funds]

The three-step manager selection process will begin with a quantitative screen to narrow down the applicants, followed by a blind qualitative section. Managers will submit answers to a list of questions without disclosing any identifying information, to remove possible bias.

All managers that pass the quantitative screen will be given equal consideration through the blind evaluation process, regardless of whether they appear on consultant buy-lists, according to Lakshminarayanan.

“All money managers have an equal chance of being funded,” he said.

Iowa PERS staff will also conduct final due diligence, visiting managers and checking data to ensure that all the information submitted by managers in the first two steps is accurate, according to Lakshminarayanan.

“There’s been a lot of conversation about why you should be 100 percent passive in a particular asset class and how active management is a fool’s errand, but a lot of it is self-serving,” Lakshminarayanan said. “We’d like to give active management a fair shot and we are open to passive implementation if our search comes up empty.”

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