By Ed Mendel
Monday, August 26, 2013

CalPERS is not investing enough money through minority-owned firms, two trade associations and several money managers say, and some want a legislative audit of “unfair” decisions, particularly for lucrative private equity funds.

The complaints caused CalPERS, which regards itself as an historic leader in investing with minority firms, to respond with plans for better communication with minority firms and a task force to look for ways to identify firms that will be successful.

The big pension fund is “very confident” that its selection process would be validated by an audit, the CalPERS board was told last week. But there have been meetings with “17 legislators or their staff in recent weeks” to explain the program.

“I am confident we can move forward in a collaborative manner,” said Ted Eliopoulous, CalPERS senior investment officer. “It’s the manner this board has led this institution and directed staff over many decades.”

As a public agency controlling a huge fund valued at $263 billion last week, the California Public Employees Retirement System is expected by many to pursue various social policies with its enormous investment clout.

Some examples: Divestment of stock in companies doing business in certain countries (apartheid South Africa) or producing certain products (tobacco); labor unions asking that shareholder influence be used on their behalf in strikes (Houston janitors).

But investments made for social goals can conflict with the CalPERS duty to give member benefits top priority. Proposition 162 in 1992 also gave CalPERS sole control of its funds, a safeguard against legislative raids or meddling.

Another problem for increasing CalPERS investments through minority-owned firms is Proposition 209 in 1996, which prohibits discrimination or preference on the basis of race, sex or ethnicity in public employment, education and contracting.

So the discussion is about making more investments through “emerging managers,” a broad category said to have a higher proportion of minorities and women than well-established firms.

A business rationale, apart from the social goal of broader participation, is that some startup firms have energetic new talent and ideas that may not be found elsewhere, giving investors a chance to get in early and catch the next wave of profitable success.

Legislation two years ago required CalPERS and the California State Teachers Retirement System to provide a five-year strategic plan for emerging investment manager participation across all asset classes.

Under SB 294 by former Sen. Curren Price, D-Inglewood, the definition of “emerging investment manager” is left to the boards of the two retirement systems, which must submit an annual report on the progress of the plan.

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