Feature | Emerging managers
tional assets are being funnelled into the industry’s behemoths, with little left for the minnows. Consider that in the 11 years since 2008, BlackRock’s assets under management have grown from $1.3trn (£1trn) to $6.5trn (£5trn) – an increase of 400% – the acquisi- tion of Barclays Global Investors, notwithstanding. But if UK investors think there is safety in numbers and not straying too far from the herd, this is not the case in the US, where these behemoths are actually based. Instead, emerging manager programmes, as they are known across the Atlantic, are a popular choice among pension investors. These programmes seek out new, small and often minority-owned fund manage- ment companies that do not have the mar- keting might or sales team of their much larger rivals. Not only do they often have fresh ideas, but they can also better reflect the make up of the pension fund member- ship, a criticism that is frequently levelled at the fund management industry. California Public Employees’ Retirement System (CalPERS), the largest public pen- sion in the US, has run an emerging man- ager programme for 25 years. In its latest annual report, CalPERS said the pro- gramme “identifies early stage funds with strong potential for success”. As of June 30, 2016, the $358bn (£280.7bn) CalPERS had $8bn (£6.2bn) in these smaller firms across global equity, private equity and real assets. The C$392bn (£228.7bn) Canada Pension Plan Investment Board also has an exten- sive program, recently hiring a London- based specialist to seek out new managers – and he may have the pick of the bunch.
DIVIDED BY A COMMON LANGUAGE While some larger pension funds in the UK may have allocations to smaller managers, there is certainly not a wider trend across the sector. Nor do many want to shout about their programme, if they have one. For Todd Johnson, chief operating officer of Global Prime Partners, it may date back to the financial crisis. Johnson, who now provides services to this
group of smaller investment houses, once ran a fund of hedge funds. “Up to 2008, investors were often using fund of funds, which did not work out too well for them as they ended up being stuck in there as other investors got out quickly, so it is clear why some are cautious about coming back in,” he says. He adds that this experience may have put off some investors, who were already trail- ing their trans-Atlantic cousins in the take up of alternative, or at least non-traditional, managers. Additional rules on ticket sizes to avoid being the dominant investor in a relatively small fund, have also held some UK pen- sion schemes back, Johnson says. But by sticking to the Vanguards, Black- Rocks and T Rowe Prices, what are most UK pension investors missing? For Bryan Lewis, chief investment officer of Pennsylvania State Employees’ Retirement System, a long-time advocate of emerging
A NEW BREED Victor Hymes, chief executive of Legato Capital Management, partners large insti- tutional investors with emerging manag- ers. Hymes was instrumental in CalPERS placing of $150m (£117.6m) with UK man- ager SourceCap in 2008. The manager was bought by Hermes Investment Managers – then owned by the BT Pension Scheme – a year later.
“The investment management world is not static or stagnant and we have to find the entry point to new ideas early,” Hymes says. “The success of a manager can be measured on a J curve, but so many wait for the three or five-year track record only to find their chosen manager has begun to run out of steam.” Johnson, who works with smaller manag- ers in the UK, says that this need to wait for managers to build up a track record can sty- mie some of the enthusiasm some pension schemes on this side of the Atlantic have.
The investment management world is
not static or stagnant and we have to find the entry point to new ideas early. Victor Hymes, Legato Capital Management
manager programmes, it could be quite a lot. “Your fundamental portfolio belief should be that you can find and source top manag- ers or those that have unique strategies that others cannot identify. Emerging managers fit into that profile,” he says. “All the good ideas are not had by just those managers that are in the largest companies. And often the talent in these smaller firms will spin out to create their own firms.”
There have been plenty of fund managers who quit larger houses over the years, and it stands to reason. Some people do not want to work for a massive organisation, others want to use the experience they have gained to do their own thing, others find they do not fit the mould of what a portfolio manager should look like.
36 | portfolio institutional | May–June 2019 | issue 84
“There is more money flowing to emerging managers in the US as investors can allo- cate earlier in a lifecycle of a fund or com- pany,” he adds.
This is the major sticking point for UK investors, but there are other challenges, too.
“It is an attractive area, but it is necessary to have enough staff or outside help to navi- gate the nuances of the sector,” Hymes says. “A manager could have very deep experience but has only just launched on their own – for an asset owner, it is hard to know who is working in this world.” Unlike picking up a sales brochure or meet- ing on a stand at a conference, emerging manager programmes require investors to seek out entrepreneurs, who are unlikely to have connections all around the investor
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