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August 09, 2005
CalSTRS Follows Calvert Blueprint to Capitalize on Money Manager Diversity
    by William Baue

Both CalSTRS and Calvert see efforts to identify emerging money managers as smart business and socially responsible as well.


Last week, the California State Teachers' Retirement System (CalSTRS) launched a new initiative to leverage the value of diversity in investment management firms. CalSTRS, the third largest US public pension fund with $129 billion in assets, is partnering with Altura Capital, a New York City-based consulting firm specializing in identifying undiscovered, underutilized, or undercapitalized investment firms. Altura will develop a database of emerging investment firms with diverse management, as well as make recommendations to CalSTRS on investment strategy and policy changes.

California demographics are transforming the linguistics of race, as ethnic "minorities" now make up the majority of the state's population, and national demographic statistics are following suit. CalSTRS seeks to capitalize on this regional and national demographic trend.

"This trend, identified by many and harnessed by few, creates an enormous opportunity that can translate into valuable and attractive products for the investment community," said Jack Ehnes, CEO of CalSTRS.

CalSTRS discovered the convergence between the demographics of increasing diversity and the competitive performance of "minority" and women-owned investment management firms accidentally, according to Sherry Reser, CalSTRS' communications director.

"A couple of programs, 'New and Next Generation Private Equity Managers' and 'Emerging Managers' in our domestic equity portfolio, uncovered smaller firms with promise, some of which were minority or women-owned," Ms. Reser told SocialFunds.com. "That wasn't the intention, but the result of targeting the search to smaller firms."

Now, CalSTRS seeks to ratchet up its existing allocation of $2.5 billion of its domestic stock portfolio and $35 million in its alternative investment portfolio to nineteen minority- and women-owned firms. These firms include Cordillera Asset Management (Hispanic), Affinity Investment Advisors (Asian), Piedra Capital (Hispanic), and Opus Investment Management (African American/Female).

Profit Investment Management, tapped by CalSTRS in June 2004, had been "discovered" long before. Three years ago Calvert, a socially responsible investment (SRI) mutual fund firm, launched its Manager Discovery Program to identify strong-performing yet often overlooked minority and women-owned money management firms in early stages of business development.

"This is something we've been thinking about for many, many years--it started out solely as a socially responsible action, and then we discovered what an astute business move it was," said Terry Mollner, a founding board member of the Calvert Social Investment Fund, which was established in 1982. "What we realized was that people were not aware of these quality managers out there because of unconscious racism and sexism."

"At some level, you have to acknowledge your own deep unconscious racism and sexism, but the process of addressing these problems is the first step toward solving them," Dr. Mollner told SocialFunds.com.

Calvert structured its Manager Discovery Program to allow for up to five percent of the Calvert Social Investment Fund Balanced Portfolio (ticker: CSIFX) to be directed to minority- and women-owned investment management firms. Profit was the first firm to get the nod.

"At the time Calvert identified us, we had strong performance, but we were in the process of trying to expand our client base, as we had less than $100 million in assets under management," said Eugene Profit, founding president and portfolio manager for Profit Investment Management. "Now, almost three years later, we're approaching $700 million in assets, and we've been able to maintain very similar outperformance in the Calvert portfolio as in our mainstream market portfolios, where we are consistently in a top-decile performer."

Since its November 2002 inception, Profit has generated 19.64 percent asset-weighted annualized returns gross of management fees, compared to 15.03 percent for the Russell 1000 Index and 12.26 percent for the Russell 1000 Growth Index, the fund's benchmarks.

Although the Calvert business did not necessarily cause the seven-fold increase in Profit's assets under management, it certainly did not hurt, according to Mr. Profit, an African American who earned an economics degree from Yale and played football with the New England Patriots.

"When you're trying to break into the business of managing institutional portfolios with very large pools of money, you really have to know the trustees and plan sponsors," Mr. Profit told SocialFunds.com. "If you don't have clients who are willing to step up and give you a shot at managing their assets, nobody else will follow suit--there's comfort in going where other people have already gone."

While Mr. Profit acknowledges the role racism plays, he notes that all emerging money managers face similar difficulties and challenges.

"Could it be more difficult because of ethnicity?" Mr. Profit asked. "Of course race issues don't go away just because we're in the money management industry, but when you get right down to it, I think the bigger difficulty is that newer firms have less resources, less assets under management, and less clients, so it's harder for clients to then engage their services from a fiduciary or a business risk standpoint."

"So it's important that some institutional investors such as Calvert support young, emerging minority-owned or even just new money managers an ability to get started, otherwise you don't have a mechanism whereby tomorrow's top-performing managers are discovered," Mr. Profit concluded.

Altura, CalSTRS' partner in its investment manager diversity program, seeks to extend the trend nationally, according to Altura CEO Monika Mantilla Garcia.

"We are going to be speadheading an emerging investment management diversity committee so institutional investors can have both internal dialogues and external discussions with one another about how to implement policy and create best practice and standards for capitalizing on investment manager diversity," Ms. Mantilla Garcia told SocialFunds.com.

 

 
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