Recommended Practices in Public Pension Fund Emerging Manager Programs

This report, produced for For the Long Term by Raben, examines the most common practices by public sector pension funds that have emerging manager programs, highlighting their governance structures, policies, and processes, in an effort to identify what best positions such programs, participants, and pension funds for success.

While there is variation in how each program defines emerging managers, the degree to which consultants are relied upon versus staff, and which asset classes are included in the program, among other factors, all of the programs seek to use their programs to tap into the next generation of asset managers and to benefit from their strong performance. Well-established emerging manager programs have a combination of talented and dedicated staff leading the program, buy-in from across the funds’ leadership, strong programs and practices that support asset managers’ growth, effective program partners, and a genuine commitment to strengthening an inclusive ecosystem in the investment management industry.

Key recommendations emerged from Raben's interviews with eight state pension funds that have emerging manager programs, half a dozen asset managers who have participated in emerging manager programs, and other industry stakeholders.

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1. Clearly define the goals of the program. 

• • • This provides everyone within the pension fund, the emerging managers, consultants, and other stakeholders with clarity on what they are working toward.

2. Consider the balance between dedicated staff and outsourcing. 

• • • While consultants can play a significant role that enhances the impact of emerging manager programs, overreliance on them can weaken the fund’s connectedness to the managers that are tasked with serving its beneficiaries.

3. Integrate the emerging manager program into asset classes of the core fund. 

• • • In the integrated model, the investment officers responsible for each asset class play a role in the selection of emerging managers for their asset class and become invested in their success.

4. Adapt the application and selection process to small firms. 

• • • Without taking undue risks, adapt the application, due diligence, and selection criteria to take firm size and maturity into consideration, and provide opportunities for feedback and dialogue throughout the process.

5. Structure manager relationships to ensure maximum alignment with the goals of the emerging manager program. 

• • • This alignment should include practices that are transparent and support emerging managers’ success, including fairer fee structures, greater transparency, and meaningful development support.

6. Develop structured and clear graduation processes. 

• • • Structure and transparency in this process will help ambitious and high-performing emerging asset managers grow their business and strengthen their relationship with the pension fund.

7. Prioritize network-building, learning opportunities, and mentorship. 

• • • Ensure the emerging manager program director’s role includes taking ownership of cultivating a network of emerging managers, providing opportunities to meet with the pension fund’s staff, mentoring emerging managers, and providing training on various business practices that support the development of emerging managers’ firms.

8. Be intentional about diversity and inclusion. 

• • • Through aspirational goals, outreach plans, encouraging a diverse pool of candidates, and tracking diversity data, being intentional about promoting greater diversity usually yields positive results.

9. Strengthen the ecosystem. 

• • • Engage with the wider industry and cultivate a strong network to leverage for the pension fund, its emerging manager program, and participating emerging managers.

10. Provide feedback and encourage dialogue. 

• • • Ensure emerging managers have opportunities to receive continuous feedback and advice, as well as opportunities to provide their recommendations for improving emerging manager programs.