Monday, May 13, 2013

CLOSING THE PENSION FUNDING GAP: Emerging Managers Have A Role

The funding gap for public pensions is enormous. This should not be breaking news to anyone. Underfunded public pension plans have been a major discussion topic over the past few years, receiving a lot of media attention and notably being detailed in a couple reports from the Pew Center on the States: a 2010 report, The Trillion Dollar Gap focused on state retirement systems and a 2013 report, A Widening Gap in Cities focused on municipal retirement systems. As you might expect, similar gaps exist for most other pension plans as well, including corporates, Taft-Hartleys and retiree health care funds.

The approaches to address these shortfalls are limited: 
  • increase direct funding, 
  • reduce benefits and 
  • add "alpha." 
So how can smaller investment managers (Emerging Managers) play a role in the solution?

Empirical data shows that Emerging Managers, systematically by asset type, generate superior returns to their larger cousins. Therefore the demand for Emerging Managers should grow as the search for excess alpha accelerates.

Here are a few of the many examples of this outperformance: 
As we have previously discussed, Emerging Managers need to address their capacity issues in order to penetrate and thrive in the institutional investment management space and large asset allocators need to adapt their practices to allocate more efficiently to Emerging Managers.

Clearly, the pension funding gaps will not be resolved by the use of Emerging Managers alone. It is going to take public policy reform to resolve these daunting challenges if we have any hope of solving the funding calculus. Nevertheless, Emerging Managers have a role and it behooves everyone to make some adjustments and use them as part of the solution. Much more to come from our team on this topic.

Lessons Learned: Small managers can be part of the funding gap solutions.

Lawrence C. Manson, Jr.
Chief Executive Officer
NexTier Companies, LLC

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