Pension plans increasing their focus on allocating to diverse asset managers

U.S. pension funds are allocating more to diverse money managers and taking more steps to measure how their assets are allocated and articulate formal policies on their processes.

This is the second year Pensions & Investments has surveyed the top 200 U.S. retirement plans regarding defined benefit plan assets managed by money management firms owned by women, minorities, people with disabilities and veterans.

As of Sept. 30, respondents said a total $120.7 billion was managed by WMDV-owned managers, up from $68.4 billion a year earlier, according to P&I data.

Plan executives are taking a more thoughtful approach to investing with diverse managers given the resurgence of the focus on underrepresented groups in the past several years, said Lauren Mathias, San Francisco-based senior vice president and head of the diversity, equity and belonging initiative at investment consultant Callan LLC, in an interview.

Plan executives are thinking "we need to figure out what our belief system is about diversity and implementing diversity into our program," Ms. Mathias said.

This includes incorporating that belief system into investment policy statements and including a diverse-owned firm in every manager search process they undertake, she said.

The result is that more plans are making direct investments with diverse managers when historically that exposure has primarily been through manager-of-manager programs, Ms. Mathias noted.

One such plan sponsor that has newly established its diverse-manager processes is Raytheon Technologies Corp., Waltham, Mass.

As of Sept. 30, the company's defined benefit plan had $55 billion in assets, $12.9 billion of which was invested with diverse managers.

Robin Diamonte, chief investment officer, said in a phone interview that the investment staff launched its asset owner diversity initiative in the first quarter of 2021.

Before then, while the plan was certainly invested with diverse managers, it was something they did not measure. The challenge in the past, Ms. Diamonte said, has been that as an ERISA plan, there has been historically a perception by some that investing specifically with diverse managers is somehow a non-financial goal.

However, Ms. Diamonte said the company, which was created in April 2020 by the merger of United Technologies Corp. and Raytheon Co., "had really stepped up their game when it comes to diversity, equity and inclusion goals and objectives; we hired a chief diversity officer who reports directly to the CEO, and we put in a global advisory council — which I'm actually part of — chaired by the CEO."

"It made everybody think," Ms. Diamonte said, "what can we do better to serve that initiative?"

She decided to apply the concept that diversity of thought could work at least as well for the company's investment management as well as it does for employment.

The objective of the initiative is to "increase the number of assets under management by diverse asset management, so with the expectation that would increase diversity and increase unique insights and increase alpha and investment returns."

The initiative is set up so it can be measured in a flexible way, Ms. Diamonte said. Last year was set up as a baseline with her staff sending out questionnaires to managers with the intention this would be an annual exercise.

The initiative embraces four pillars: firms with greater than 50% ownership by diverse individuals, women or people of color; firms with between 25% and 50% owned by those individuals; firms in which the portfolio management functions consist primarily of diverse individuals; and firms that displayed strong improvement and commitment to diversity, equity and inclusion.

"The idea is we're going to send out this questionnaire every year and hoping each of these pillars (increases) year over year," Ms. Diamonte said. She said there was some pushback from some organizations that said they didn't collect this kind of information, or that the information was private.

"Luckily, we're large enough and important enough a client to these folks, and they also see the writing on the wall," Ms. Diamonte said. "I'm a member of CIEBA (the Committee on Investment of Employee Benefit Assets) and I'm working with SBIA (Small Business Investor Alliance) to come up with a standard manager questionnaire template for due diligence. I think it will help asset managers so they don't have to fill out this information in so many different flavors."

She also noted that it is likely managers will have to build up their staffs in order to answer these kinds of questionnaires just as they currently do for working on requests for proposals.

Another plan sponsor that has increased its commitment to diverse managers is the $98.5 billion Massachusetts Pension Reserves Investment Management Board, Boston.

As of Sept. 30, the board had $7.6 billion in WMDV-owned manager assets, up from $4.4 billion a year earlier.

In May, the board launched FUTURE Initiative, with the goal of bringing the pension fund's exposure to emerging and diverse managers to at least 20%, a goal set by a bill that Massachusetts Treasurer and MassPRIM Chairwoman Deborah B. Goldberg spearheaded and Gov. Charlie Baker signed into law in January 2021.

"Regardless of whether a manager is considered diverse or not, PRIM follows a manager selection playbook that utilizes both quantitative and qualitative analysis to select the best manager for PRIM," Deputy CIO David M. Gurtz said in an email. "The FUTURE Initiative focuses on helping PRIM widen our pipeline of diverse managers as well as reduce barriers with the new emerging-diverse manager program."

Mr. Gurtz said he believes a large base of diverse managers helps the board ensure it has broad diversity of thought among its managers.

Angela Miller-May, CIO at the $54.9 billion Illinois Municipal Retirement Fund, Oak Brook, echoed those sentiments in a phone interview.

"It is really just about having differentiated thought and decision-making around investments," Ms. Miller-May said, "and I think one way to get there is through increased diversity, and that's kind of our rationale and how we've thought about or approached diversity and equity."

As of Sept. 30, IMRF reported $12.1 billion in assets managed by WMDV-owned managers. Most of those assets are direct relationships with managers, with a small percentage in manager-of-manager programs.

"If there is a need in the portfolio, we can source our managers from the manager-of-manager program without conducting a request for proposal process," Ms. Miller-May said.

Among the top 200 U.S. retirement plans with a defined benefit plan, 28 said they have a hiring policy for WMDV-owned managers, up from 27 responses the year before. Five of the 28 plans that have a hiring policy did not indicate they had one for the 2020 survey period.

Callan's Ms. Mathias said while a number of clients have already implemented changes to their investment policy statement to address diverse managers, most are in the beginning of their processes.

She compared the momentum of hiring diverse managers to the discussion of ESG investing, which has only seen significant implementation in recent years.

"I feel like we're on the precipice of that happening from a diversity standpoint," Ms. Mathias said. "An asset owner needs to have an approach of what they think about diversity, how it will affect their investment program, and have verbiage behind it. I think we're not there yet, but I think that's going to be something that's going to be relevant for the future."

"This is not just a phase," Raytheon's Ms. Diamonte said. "(Managers are) going to have to be held accountable for going into the future."