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NAIC's Open Letter To CalSTRS

The National Association of Investment Companies (NAIC) today issued the following letter to Chief Investment Officer magazine in response to troubling material the media outlet reported on the California State Teachers' Retirement System's (CalSTRS) diversity and emerging manager programs. Because of its importance to the field, the NAIC is today making the letter public. 

"Dear Reader,

Reasonable people now find it incontrovertible that diversity improves outcomes.

It is true for boards, it is true for leadership, and it is true for workforces. Nearly all leaders are past the point of debating whether to invest in diversity and focus their attention on how to do so. Yet, exceptions linger – particularly in asset management. An especially troubling example of this was reported in an April 3rd article in Chief Investment Officer reporting on CalSTRS' negative experience with minority managers in the global equity portfolio.

In its approach to diversification, CalSTRS finds itself in a bygone era as it poorly executes a diversity effort and then too quickly reverts to whether diversity itself is the problem. It seems that CalSTRS does not consider that a poor approach to diversity guarantees poor outcomes. The logic of CalSTRS' CIO, Christopher J. Ailman, is that returns for emerging and diverse managers in the global equities space lagged, so they need to be quarantined. This will ensure that the bonuses and integrity of the internal managers who selected these underperformers are not compromised. This remedy and what it insinuates torches the reputation of all managers of color based on the performance of a narrowly curated few; and implies that not only are managers of color underperformers, but they are costly, with "double fees" being paid for use of fund of funds. And because of Mr. Ailman's paramount influence in the industry, his misguided comments risk outsized damage.

Here are the facts: research studies have shown that women and people of color perform as well as, and often better than, men and white-owned firms. In fact, Examining the Returns, a 2017 performance study by KPMG and Aon Hewitt, reported that diverse private equity funds outperformed the median Cambridge U.S. private equity funds during a majority of vintage years on an IRR and Multiple on Invested Capital (MOIC) basis. For the period 1995 through 2015, Diverse Private Equity Funds generated an Internal Rate of Return 500 bps over the Cambridge index.

To understand the gap between these widely accepted facts and the views of the CalSTRS leadership, we need to reflect on how CalSTRS got here. Disappointing results can be jarring, but if CalSTRS is genuine in its commitment to diversity, they must interrogate the failure of the program they implemented. Did they pick the right fund of funds?  Did they curate the right managers? Was there a process to integrate these emerging funds into the larger ecosystem? Are they held to the same or a different standard than white male emerging managers?  Do we even collect the numbers for performance of that latter cohort? A quantitative assessment of data tells nothing of the experience of the women and people of color they hired, or the efforts of the internal managers that ran the program. They should interview these people and convene broader conversations with experts in the field about whether the diverse managers were the right ones in the first place, and whether the method of their selection and involvement was optimal.

CalSTRS has made obvious strides in the advancement of white women and pushed those in which it invests to do the same. On race, it lags. By sidestepping a thoughtful process and moving to segregate diverse asset managers, CalSTRS will remain stagnant and signals abandoning its stated commitment to diversity overall.

To look at the profound lack of diversity among the leadership of CalSTRS offers an important window into how they arrived at the conclusion that their approach to diversity was holistic, thorough, and failed. Over the last ten years, it seems that CalSTRS has missed the opportunity to invest directly with some of the top-performing managers in the U.S. – Clearlake Capital, Siris Capital, Sycamore Partners, Vista Equity Partners – who also happen to be diverse-owned. If CalSTRS had committed to the most recent oversubscribed funds led by each of these aforementioned managers, the CalSTRS leadership would probably be applauding diverse manager performance instead of speaking about its challenges.  It may be easier for CalSTRS to blame lagging performance on others, but the only way to reverse this trend and outperform is to look within.

Though CalSTRS has the resources to curate any managers it wants, diversity does not appear to be an internal mandate. It has the staff, and the expertise, to do due diligence, with anyone, anywhere. Like so many of its peers, CalSTRS would benefit from viewing high-performing talented women and people of color as a solution, not a problem. We have great numbers, we find opportunities where others may not even look, and we represent the future.

That's the right path to stronger diversity – and stronger returns.

Best regards,

Joseph Haslip  
Chairman 

Robert L. Greene
President & CEO"