The head of a group with 500 black U.S. mayors wants the leaders to change policies on hiring investment firms to manage city pension funds. The effort is aimed at providing managers of color a better shot at administering those funds.
New Haven, Connecticut, Mayor Toni Harp, president of the African American Mayors Association (AAMA), is requesting that all mayors introduce language into their city’s pension investment policies requiring trustees to also consider allocating assets to diverse-owned firms. That includes allotting funds to firms with under $3 billion in assets under management (AUM) or shorter track records.
Diverse Asset Firms’ Strength
Harp’s request comes as studies have shown that diverse-owned firms have provided returns that are stronger or equal with their non-diverse peers. Yet diverse firms are greatly underrepresented in the asset management industry. A recent Knight Foundation report showed firms owned by minorities and women manage only 1.1% of the industry’s total $71.4 trillion in assets under management. Experts say accountability and priority are some elements that must prevail before the low levels of diversity in the asset management business can be turned around.
The change in inadequate asset manager hiring practices was discussed at the AAMA Women’s Retreat and National Leadership Summit in mid-December in New Haven. Mayors gathered to evaluate and set new AAMA priorities on topics including improving infrastructure in cities, job creation, criminal justice reform, education, smart cities and technology, and diversifying asset management in cities.
The 2017 summit marked the first time mayors discussed the diverse asset management reform issue.
Earlier this year, Harp successfully led an effort to dramatically increase the use of diverse asset managers who service New Haven. She guided city investors to consider “emerging managers” among the firms they hire to manage the city’s pension fund. Now, she is challenging her peers to do the same.
In June, New Haven’s City Employee Retirement Fund (CERF) approved a measure that will boost the use of diverse asset managers. It allows investors to consider “emerging managers,” including minority-owned, veteran-owned and women-owned firms, bringing an essential diversity of perspective and experience to the asset management of the city.
Emerging managers are considered investment managers with less than $3 billion of assets under management or with shorter track records. They can be considered by CERF for all asset classes. The measure instructs trustees to limit an investment allocation to no more than 20% of the firm’s assets under management.
“Our new policy makes clear that New Haven’s financial economy should be open for everyone, and I encourage my colleagues around the country to do the same,” she says. “It will take the combined leadership of my fellow African American mayors to change current entrenched practices that underutilize talented diverse-owned asset management firms.”
Piercing False Notions About Diverse Firms
So what types of policies do cities use now or have cities been using that have resulted in diverse-owned firms getting such a small piece of their assets under management?
Harp says to the extent cities have policies, many specifically speak to the aforementioned “emerging managers,” a reference to the track record and the amount of assets under management, and not diversity precisely.
She says many investment policies do not address diversity directly because trustees may find difficulty with balancing fiduciary duties to maximize performance with the inherent risk of engaging a new manager. She added there are also false perceptions that diverse managers do not perform as well and this is simply untrue.
“Mayors and trustees must put the onus on themselves to attend more investment conferences, meet more diverse managers, and seek out learning opportunities to understand the economic benefits of not only diversifying their pension portfolios but the managers of their pension assets as well.”
It is hard to estimate the impact of policy changes because mayors have various levels of control and appointment authority over their pension systems, Harp says.
In New Haven, Harp has appointment authority over both the city’s civil plan and union pension plans that service police and fire professionals. Regardless of their level of authority, she still urges mayors to use their power of convening to make this issue a priority. “While we would expect the overall AUM for diverse-owned asset management firms to increase, there is still research that needs to be done to determine a baseline by which to measure the increased use of diverse-owned firms by municipalities, specifically.”
Harp says the lack of information points to a larger problem, which is the critical need for more data, research, transparency and a database that tracks diverse ownership in a comprehensive and systematic way. “AAMA is taking the initiative to gather this data at the municipality level through improved investment policy practices to better inform and shed light on this issue.”