Manager SelectionNovember 22, 2023

NYC Pensions Increase Allocation to Emerging Managers Following Outperformance

Minority- and women-owned managers have beaten the city’s pension funds’ benchmarks in all asset classes since 2015.

Reported by Michael Katz

New York City’s pension funds announced they are expanding their emerging manager program after an analysis showed that the women-and minority-owned asset managers with whom they invest have outperformed their benchmarks net of fees in all asset classes since 2015.

“Rigorous analysis conducted over the past year in partnership with our five boards clearly indicates that diverse-owned firms have led to important gains within our portfolio,” New York City Retirement System CIO Steven Meier wrote in the retirement system’s second annual report of investments in minority- and women-owned business enterprises and emerging manager firms.

According to the report, participation of MWBE managers in the retirement system’s U.S.-based, actively managed assets grew to $19.5 billion, or 12.86% of its total portfolio, as of the end of June, from $16.82 billion, or 11.65%, last year. New York City Comptroller Brad Lander said in the report that he expects that by 2029, 20% of the pension funds’ U.S.-based, actively managed assets will be invested with minority- and women-owned investment firms.

“The strong historical performance of emerging managers both diverse and nondiverse—has prompted a strategic decision to recommend the expansion of our Emerging Manager programs,” the report stated. “We believe this expansion aligns with the overarching goal of securing long-term financial stability for pension beneficiaries, ensuring prudent diversification, and harnessing the potential of dynamic and successful asset management strategies.

As part of the expansion of the emerging manager program, the Comptroller’s Office announced it is looking into proposals that include:

Expanding the direct emerging manager program in private equity;
Creating a direct emerging manager program in real estate and alternative credit; and
Expanding the fixed-income emerging manager program to include a direct emerging program.

“We often cite portfolio diversification as an important strategy for achieving portfolio objectives, and diversity supports diversification,” Meier said. “As large institutional investors, we benefit from a diverse portfolio of asset managers and strategies, and we’re well-positioned to expand our diverse and emerging manager mandates across asset classes.”

Among the portfolios’ asset classes, hedge funds are by far the most represented by emerging managers, who represent 36.71% of the asset class’s total exposure. This was followed in a distant second by private equity at 8.36% and alternative credit at 7.09%. Emerging managers represented 5.58% of public equity’s total exposure, while they represented 2.63% of private real estate, 1.78% of private infrastructure and 1.03% of public fixed income.

“MWBE managers have historically generated alpha for the five New York City retirement systems since 2015,” the report stated. “In Public Markets, all MWBE managers have generated excess returns net of fees. In Private Markets, the MWBE firms in the Systems portfolio have outperformed their respective benchmarks with an average PME Spread of 4.9%.”

The report noted that PME—public market equivalent spread—is a measure of the opportunity cost of investing in public market equivalents, and a positive PME spread indicates outperformance.

Within the private equity asset class, emerging managers have a PME spread of 8.5% since 2011, when the city’s retirement systems changed their strategy and approach to private equity investing. In real estate, emerging managers have a PME spread of 5.5% since 2015, when the real estate emerging manager program was relaunched. Alternative credit emerging managers have a PME spread of 24% since its inception in 2015, and infrastructure and hedge fund emerging managers have PME spreads of 6.48% and 3.96%, respectively.

“We hold our fiduciary duty to the pensioners first and foremost, and we will continue to identify emerging and diverse managers that we believe offer strong risk adjusted returns for our systems,” Lander said in the report.