The board at the Ohio Public Employees Retirement System has voted in favor of ending its $520 million emerging manager program, a spokesperson for OPERS confirmed via email Friday.
The emerging manager program’s requirements made it difficult to find suitable investment firms for the program, according to a board memo on the program’s review prepared by OPERS investment staff, including chief investment officer Paul Greff. That, coupled with the fact that the program has lost money since inception,led investment staff to call for its discontinuation.
Emerging manager programs are in vogue among big institutional investors: the Employees Retirement System of Texas and Teacher Retirement System of Texas made moves to grow their emerging manager programs over the past year, while the Massachusetts Pension Reserves Investment Management Board’s program made its first investments in an earlier-approved mandate.
These programs were created to seed and support emerging and minority managers, but they were also expected to pay off for pension funds: smaller asset managers beat larger ones on a regular basis, research from Affiliated Managers Group published last fall shows.
But because of necessary due diligence — and sometimes firm guidelines — programs like the one at OPERS do not always perform the way investors had hoped.
Greff — along with DeAnne Mannion, senior portfolio manager for external public markets at OPERS, and Ryan Casebolt, senior investment analyst for external public markets — presented a request to end the program to the board of trustees on Wednesday.
According to their memo to the board, OPERS initially invested in funds of funds through its emerging manager program but shifted its strategy in 2012 in a bid to reduce costs and improve performance. Fees related to the program decreased by 42 percent as a result of this move, the memo said.
The emerging manager program’s stringent requirements on minority ownership and assets under management severely limited the pension plan’s ability to find managers – just 41 managers on the eVestment database OPERS uses to source managers met all the program’s requirements, the memo said.
A lack of selection could also lead to longer-term problems, the memo showed. “It also creates the possibility that OPERS might need to hold existing managers for longer periods due to a lack of satisfactory replacements,” it said.
The program’s annualized performance net of fees through March 31 was a loss of 1.58 percent, according to the memo. The memo said the poor performance was the result of general underperformance of active U.S. equity strategies, the structure of the program — which allowed successful managers to graduate into the larger OPERS plan — and the limited universe of funds OPERS could invest in.
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The memo claimed that even without a specific emerging manager program, OPERS will still invest in minority-owned firms. OPERS currently is investing 2.8 percent of all externally managed global long-only equity with minority-owned firms, which is exceeding the 1 percent target set by the OPERS emerging manager program, according to the memo.