PBGC Offers Small Fixed Income Managers a Ticket to Ride

The Pension Benefit Guaranty Corporation (PBGC) is searching for fixed income managers to run mandates on its Smaller Asset Managers Pilot Program.

The US’ lifeboat for bankrupt company defined benefit plans has issued a request for proposals to relatively small managers who wish to run active US fixed income portfolios.

“The Smaller Asset Managers Pilot Program creates new opportunities for such firms by reducing the required amounts of the assets they manage and their mandates,” the PBGC said.

Allocations will range from $50 million to $250 million, and only companies with more than $250 million already under management will be eligible to apply.

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“Before the pilot program, these contracts were out of reach to the firms because the minimum amounts of the investments, often in the billions, were too large for the firms to accommodate,” the agency said.

The lifeboat announced the programme earlier this month and hosted a pre-bidder’s conference to help smaller asset managers understand the process it uses to select funds.

It is expected to award two or three contracts this year, with a maximum of five being allocated as part of the pilot programme.

The pilot follows several emerging manager programmes initiated by large US public pensions in recent years.

Across its various funds and portfolios, the PBGC manages around $80 billion and each year pays out more than $5.6 billion to members of pension funds it has taken under its auspices.

Details of the mandates to be issued can be found on the Federal Business Opportunities website. Proposals are expected by August 18.

America’s largest pension fund is halfway through culling its manager roster from roughly 300 down to 100, but the overhaul may actually benefit its emerging managers.

Or, rather, its high-performing small managers.

“Our goal is to have fewer, more strategic relationships with external managers,” Ted Eliopoulos—CIO of the California Public Employees’ Retirement System (CalPERS)—told the fund’s investment committee during a meeting Monday.

“The strategic portfolio restructuring includes our ongoing commitment to emerging managers,” he continued. To this end, the fund is creating “a new opportunity for successful emerging managers to compete for new capital commitments and transition to larger direct relationships in CalPERS’ portfolio.”

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Firms in its existing incubator program often outgrow the “emerging manager” label before amassing sufficient size to qualify for regular mandates, according to investment staff. Portfolio Manager Laurie Weir called this “a kind of a limbo,” which CalPERS aims to solve in its ongoing restructure.

“The new manager transition program will provide the opportunity to invest in follow-on funds with incrementally larger commitment amounts,” Weir said. This would give CalPERS staff “significant additional time to test and improve the skills and capacity of investment manager firms.”

Private equity, real estate, and global equity divisions can source transition candidates from both inside and outside of CalPERS’ emerging manager program, Weir said. These middle-sized firms will be evaluated first via track record, then on strategy, value creation, management team and talent, asset allocation, portfolio fit, and finally alignment of interest with the pension fund.

“Managers will have to constantly compete to meet or exceed expectations in order to remain in the manager transition program,” Weir noted.

She estimated that CalPERS will commit up to $7 billion to approximately 15 transitioning managers over the next five years.

CalPERS EM Slide

Related Content: CalPERS Plans to Cut Managers by 50%