New York City Comptroller Scott Stringer on Friday called for allocating an additional $1 billion to emerging managers --- firms that include minority and women business enterprises - of the city's five public pension funds.
Such investments total $12.9 billion, or 8.6% of the city's $150 billion in pension assets.
"This is forward thinking and represents a step in the right direction," Stringer said in an interview after his speech at an investor conference at United Federation of Teachers headquarters in lower Manhattan.
The allocation, to be split among real estate, hedge fund and opportunistic fixed income classes, is part of a five-point plan to "build a robust partnership" with those managers, Stringer said.
Emerging managers are defined as smaller firms, or those that the traditional search process overlooks. Though definitions vary by asset class, they have less than $2 billion of assets under management and less than a three-year track record. The inaugural emerging manager investment was made in 1991. MWBE firms have at least 50.1% ownership by a minority or a woman.
"Emerging managers can add a diversified point of view - and a competitive advantage - that boosts the long-term success of our funds," said Stringer, who as comptroller serves as custodian of the pension funds. "I'm not talking about a separate class of investors. They're part of the mainstream - just like every other firm."
Stringer said this marks the first time the city's pension funds will include hedge funds and opportunistic fixed income as emerging manager investments.
"This will enable us to vary our asset allocation to hit the threshold of 7% and beyond," he said after the speech. "My job as the chief investment officer of the city is to make sure our pension funds hit targets. The less the city pays toward its pension shortfall, the more it has available for schools and vital city services."
The pension funds have a funded ratio of 61%, according to a comprehensive annual financial report issued in 2013 that reflects levels of two years earlier.
He told investors that last year, New York spent $16 billion on everything from construction projects to attorney's fees, but less than 3% of that went to minority and women-owned business enterprises.
"Bring your A game," he said. "I realize 'procurement' may not be a word that gets people out of their seats. No one is going to say 'no procurement, no peace.' But it's a crucial issue for New York."
Public pensions have come under the national spotlight, with pension obligations at play in struggling Detroit, Illinois and Puerto Rico. Rhode Island is defending a lawsuit challenging the legitimacy of its 2011 law that overhauled its pension system for state employees. Pennsylvania, whose unfunded pension liabilities is estimated at upwards of $50 billion, has received rating agency downgrades.
"Investors, analysts and advisors should apply the same discipline to analyzing pensions and other retiree benefits as they do to analyzing general financial conditions, in our view," Wells Fargo Securities senior analyst Natalie Cohen wrote in a commentary on Wednesday.
As of Dec. 31, according to Stringer's office, the New York City pension funds have emerging manager investments of $5.7 billion in public equity, $1.5 billion in fixed income, $300 million in real estate investment trusts, or REITs, and commitments of $5.2 billion in private equity and $271 million in real estate.
Other Stringer initiatives include implementing a "graduation" policy to reward and retain successful managers; appointing one staff person in every asset class to serve as a point of entry for new managers; reach out to emerging managers through networking events; and a search for developing managers for U.S. equities and fixed income.
Moody's Investors Service rates the city's general obligation bonds Aa2, while Fitch Ratings and Standard & Poor's rate them AA.
Shortly after taking office in January, Stringer called for a six-point plan to overhaul the bureau of asset management's oversight of the funds. It included a ban on private placement agents.
"That's being implemented as we speak," he said Friday.
