Trade body releases open letter over CalSTRS’ stance on diversity–owned asset managers

Strongly worded missive from the National Association of Investment Companies

A trade body for diverse-owned investment managers has criticised the California State Teachers Retirement System (CalSTRS) over the pension giant’s perceived stance on minority/diverse portfolio managers.

The criticism comes in an open letter from the Washington DC-based National Association of Investment Companies (NAIC) in response to a report earlier this year which quoted CalSTRS’ Chief Investment Officer Chris Ailman discussing the fund’s global equity developing manager program. The initiative commissions fund managers owned by women and minorities.

NAIC, which says it is the largest network of diverse-owned and emerging private equity firms and hedge funds, is headed by President and CEO Robert Greene, the chair of trustees at the $75bn Virginia Retirement System. Greene co-signed the letter with NAIC Chair Joseph Haslip.

“In its approach to diversification, CalSTRS finds itself in a bygone era as it poorly executes a diversity effort and then too quickly reverts to whether diversity itself is the problem,” Greene and Haslip wrote in response to the article, published by CIO magazine. “It seems that CalSTRS does not consider that a poor approach to diversity guarantees poor outcomes.”

Currently, several dozen of these managers are investing money for CalSTRS in six fund of funds, according to the report, which quoted Ailman as saying they had “drastically underperformed” other equity managers and internal equity portfolios in most periods between 2004 and 2016.

The NAIC letter poses a series of questions: “Did they pick the right fund of funds? Did they curate the right managers? Was there a process to integrate these emerging funds into the larger ecosystem? Are they held to the same or a different standard than white male emerging managers? Do we even collect the numbers for performance of that latter cohort?”The letter lists a series of top-performing and diversely owned funds – Clearlake Capital, Siris Capital, Sycamore Partners, Vista Equity Partners – and asks why CalSTRS did not commission these funds to manage its investments.

“CalSTRS finds itself in a bygone era”

The letter refers also to a “profound lack of diversity” among CalSTRS’ top officials, and says: “Like so many of its peers, CalSTRS would benefit from viewing high-performing talented women and people of color as a solution, not a problem.”

Ailman said in a statement to RI: “CalSTRS has a long history of implementing the principles of diversity and inclusion, both as core values of the organization and in the active management of its funds.

“We have been and will always continue to focus on expanding the diversity of our investment managers. This is our goal and our effort will never stop. Contrary to any suggestions otherwise, there have been no recent changes in our emerging manager program. CalSTRS is committed to ensure that the spirit and outcomes of the program are best realized while also ensuring that returns are achieved.”

A document presented at a CalSTRS board offsite meeting in March this year recommended a review of the pros and cons of the fund- of-funds approach. The program was established in 2004, the paper said, adding that investment performance was “deficient over the entire period” prior to a 2016 restructuring. Contributing to this were the high fees of the fund-of-funds structure, the document said.

“If the program was created to generate positive excess return, then it was not successful for the first 12 years, and it remains to be seen if it will add alpha [market outperformance] going forward,” it also said.