Credit: (NJ Treasury)

As part of its mandate to maximize returns for retirees, New Jersey’s public-worker pension fund has partnered with some of the nation’s largest asset-management firms to augment the efforts of its in-house investment staff.   

But over the last year, collaborating with smaller investment firms, which are often run by people of color and women managers, has become a new priority for the state’s nearly $90 billion pension fund. 

Last month, the Department of the Treasury’s Division of Investment hosted an “emerging managers” symposium that drew more than 500 virtual participants from across the globe, according to event organizers. There, the state’s top pension-fund officials cited studies that suggest investment returns grow as the talent pool of investment managers becomes more diverse. 

“In short, adding smaller, emerging managers, including diverse talent, into an investment portfolio adds to the performance of a portfolio,” Shoaib Khan, the director of the Division of Investment, said during the event. 

“They bring new ideas, new processes and new thinking, and have demonstrated superior, risk-adjusted returns for our beneficiaries,” added Deepak Raj, chair of the New Jersey State Investment Council.  

The money involved

In addition to hosting the symposium, which drew praise from investment council members during a public meeting last week, the pension fund last year formally launched an “emerging managers platform” to help increase its access to minority-owned and women-owned investment firms that are often overlooked by more traditional investing strategies.   

So far, it has resulted in the advancement of two new pension-fund investments, with as much as $500 million potentially being set aside for emerging managers.

In all, New Jersey’s public-worker pension fund backs the retirement benefits for roughly 815,000 current and retired government workers. The fund is financed with contributions made regularly by government workers and their taxpayer-funded employers, including the state, as well as dedicated revenues from the New Jersey Lottery. 

Fund assets are also managed on a day-to-day basis by the Division of Investment, as well as outside fund managers, under policies set in law and by the investment council. 

‘In short, adding smaller, emerging managers, including diverse talent, into an investment portfolio adds to the performance of a portfolio.’ — Shoaib Khan, Division of Investment 

While much of the pension fund is invested in traditional asset classes like stocks and bonds, a significant share of the portfolio has also been devoted to so-called alternative investments, like hedge funds and private-equity funds, as part of a long-standing diversification strategy aimed at easing the impact of market volatility and economic downturns. 

Through its emerging-managers platform, the pension fund is now using separately managed accounts, or SMAs, to source, conduct due diligence, invest in and oversee new allocations to emerging fund managers.  

That allows state investment managers to invest with large, well-established asset-management firms that have the resources and expertise to “anchor first-time funds and scale with the underlying funds throughout their development,” according to Treasury officials.  

Finding managers who fit 

Using criteria established by the state, the SMAs help identify successful emerging fund managers who fit into the pension fund’s broader portfolio and have the potential to “graduate” into direct relationships with the division, the officials said.

The first big investment launched through the emerging-managers platform was initiated last year in the form of an up to $250 million commitment to a private-equity investment vehicle separately managed by Barings, a North Carolina-based asset-management firm.

Barings was selected, in part, because it has a record of working with organizations that are focused on improving the representation of women and diverse managers in the asset-management industry, officials said at the time.  

Earlier this year, the investment council reviewed another up to $250 million investment in a separately managed account overseen by the Chicago-based GCM Grosvenor asset-management fund that will target real-estate investments.

According to a memo presented to members of the investment council prior to an April 2023 public meeting, the pension fund’s current real-estate portfolio has a “concentration of large, mature managers that focus on large-scale assets or portfolio transactions.”   

“The SMA will provide exposure to investment opportunities that are below the radar of many of the Division’s existing managers,” the memo said.  

Meanwhile, the GCM Grosvenor investment will target net returns of between 11% and 13%, according to the memo.  

If realized, those returns would easily best the assumed rate of return for the broader pension fund, which is currently set at 7%.   

Murphy’s priorities

Gov. Phil Murphy, a former Goldman Sachs executive, has prioritized the health of the pension fund since taking office in early 2018. Indeed, it’s been during his tenure that the state has resumed making full annual employer pension contributions after more than two decades of failing to do so.  

Still, the pension fund remains saddled by a significant unfunded liability, and the latest long-range projections indicate it will take decades to undo the damage, putting more pressure on the state to maintain robust funding — and on the pension fund’s investment managers to generate strong returns.  

‘Harnessing diversity will ultimately help us meet our fiduciary responsibility to the pension fund and its more than 800,000 members.’ — Gov. Phil Murphy. 

In a news release issued after last month’s symposium, Murphy praised the emerging-managers initiative, saying it is helping to “build up the next generation of talent.” 

“As one of the largest public pension funds in the nation, we have both an opportunity and an obligation to cast a wider net to attract a broad range of diverse investment opportunities — especially investment managers from underserved communities,” the second-term Democrat said. 

“Harnessing diversity will ultimately help us meet our fiduciary responsibility to the pension fund and its more than 800,000 members,” Murphy said.