The definition of emerging managers was extremely fuzzy, and so were the returns. CalPERS just announced the optimization of the definition.
According to the publication Pensions & Investments, Joe Dear of CalPERS ($200B+ Total Assets under Management) has redefined the meaning of emerging managers, no longer allowing age-old fund-of-funds to finagle themselves to comply to that definition and rake up an endless chain of (usually) smaller funds. Instead, CalPERS now allows only first or second institutional funds to be classified as emerging managers.
Indeed, emerging manager definitions were all over the place. Some pension funds referred to those definitions as investments into emerging markets (another loose definition). Some referred to them by the size of the fund, publicly heralding their out-performance over more substantial funds. Some referred to them as allocations to asset classes that were new. And some even referred to them as investments in racially diverse managers, as part of intersecting diversity programs.
Significant progress in cleaning up the flawed deployment of investment risk in asset management this is not, and a downstream sub-optimization that will yield virtually nothing. Albeit, the clarification by the CalPERS investment committee may clean up some fragmentation of money and responsibility to the investment thesis.
But unless Joe shakes up the pancake economics of asset management that by economic principle can never consistently produce outlier returns, the clarification of emerging managers will do very little to clean up the foggy investment disciplines used to deploy The People’s money.
Pension funds (and other institutional investors) ought to construct their investment strategies around the types of deployment of investment risk, not by the classification of distribution vehicles.
And so this change is a small one in a long road of recovery needed to clean up the investment strategy of pension funds that still lies ahead.
