*The California Public Employees Retirement System, also known as CalPERS, is the nation’s largest retirement fund for state, local and education employees with a portfolio of $226 billion dollars.
This money is managed by fund managers who seek to bring a minimum of seven percent (7%) return on pension funds that provide some 536,000 retirees a monthly pension from some 1.1 million members.
It is a privileged opportunity for fund managers to be entrusted with managing the “people’s” retirement funds. A privilege that have often escaped private fund management firms owned by blacks and Latinos—in a state that is over 50% minority and whose recipients of retirement pensions are, at least, 25% people of color.
Public service employment has been the one space where minorities have some long term job security, yet when it comes to managing retirement plans, minority fund managers fall off CalPERS radar. Why is that?
It seems that minority fund managers play against a stacked deck in the selection process from the start. In the past three years, it appears that CalPERS have been caught up in “pay to play” scandals where private fund managers pay a fee to “placement agents” to gain access to large placements, and keep CalPERS placements in their fund portfolios for long term investment opportunities. A 13 member administrative board-appointed by the Governor-oversees the fund, regulates the performance of the fund and selects who gets to manage the fund. It is one of the most closely watched funds in the world. Fund managers from all over the world compete to manage the fund and controversy over how fund managers are selected (and rejected) have been in the news over the past few years. CalPERS apparently has no rules against paying placement fees but now that loophole has been discovered, it has created questions about the integrity of the fund management selection process and its treatment on minority private firms.
The biggest controversy has been in the pension fund management selection process. Because this fund is so large and so closely held by “inside players,” CalPERS has been criticized over the years for its absence of diversity. People of color, blacks and Latinos in particular, have historically been shut out of this process. First raised by former Speaker of the California Assembly, Willie Brown, more than two decades ago, the question of the absence of “qualified” fund managers has been more a question of selective engagement than objective qualifications. Five years ago, CalPERS hired the Centinela Capital Partners, owned by two Latinos and an African American, to manage a micro fund called the “Emerging Managers Fund” to let minority firms have a spot a pension funds management. Sort of a micro loan fund for “the big boys.” Centinela was the only firm in the program and the minority firm hired to run this fund. CalPERS placed $1 billion dollars with this fund for investment.
In case you’re counting, that’s less than one-half of one percent of all of CalPERS investment funds—clearly not enough to pose any real risk on investment returns. Centinela met its requirements of bringing in a seven percent return (in some years, it was higher). In the meantime, CalPERS “pay to play” scandal broke. Centinela wasn’t implicated in the scandal. Centinela broke no rules. Centinela made no moves that concerned the State Attorney General’s Office nor the SEC. Yet, for some reason, Centinela was singled out because one of its owner knew one of the persons being investigated by the State and the SEC for collecting exorbitant placement fees ($58 million dollars in one instance). CalPERS asked one of Centinela’s owner to resign because of the association with this placement agent. Centinela complied so not to be implicated in any “guilt by association” link when it went up for reconsideration.
After all that, CalPERS decided to drop Centinela as a fund investment manager of the Emerging Managers program. Even though many of the firms, that used placement managers in their main portfolio, are still being retained, including two firms that CalPERS recently placed over $8 billion dollars in pension vehicles to manage. What did Centinela do to cause such a reaction? No one can figure it out. Centinela is claiming that it has nothing to do with its business acumen and has alleged racial discrimination. CalPERS is claiming its nothing but a business decision. It’s a strange move for the nation’s largest fund short on “qualified” minority private fund managers. Why is its only minority firm taking the fall for lack of oversight by CalPERS? It’s a question we are all asking. A state hearing will be held on October 10th to try to get some answers. While they’re asking questions, they should ask why there are so few minority firms playing in this stratosphere. I know that’s another issue, but without Centinela in the mix, we’re now back to square one, in terms of who’s really qualified to manage CalPERS funds.
In the meantime, another minority firm has been scapegoated and CalPERS has nobody to answer to, beyond the folks that have been influence peddled by insiders, who knew the loopholes in the selection process and got paid millions for there placements. Where’s the fairness here? There is none, but wealth management has never been about fairness. It’s always been about access, specifically who can access billion dollar pension funds, the inside games played in the investment arena and who gets away with residual and derivative payments that the common retiree knows nothing about. Centinela Capital Partners shouldn’t have been let go.
Somebody should answer for this miscarriage of justice.
The question is, will they?
Anthony Asadullah Samad, Ph.D., is a national columnist, managing director of the Urban Issues Forum (www.urbanissuesforum.com) and author of the upcoming book, REAL EYEZ: Race, Reality and Politics in 21st Century Popular Culture. He can be reached at www.AnthonySamad.com or on Twitter at @dranthonysamad.