THE STRATEGIC VALUE OF INVESTING IN EMERGING MANAGERS
Message from Bryan Fujita
LAFPP CHIEF INVESTMENT OFFICER
To meet our ongoing co
mmitment to maintain Los Angeles Fire and Police Pensions’ (“LAFPP”) financial health and fulfill our fiduciary duties to you, LAFPP’s investment program deploys a variety of diversification strategies. Evaluating a wide range of investment opportunities—beyond those offered by the most well-known investment firms in the industry—and engaging with lesser-known Emerging Managers allows us to identify new and/or unique investment strategies that have the potential to produce strong returns while providing diversification to LAFPP’s investment portfolio. The Board of Fire and Police Pension Commissioners (Board) established a program to invest with emerging investment firms in 1991. An Emerging Manager is typically a small firm that may be a new entrant to the market or relatively early in its business lifecycle. LAFPP first identifies Emerging Managers based on the type and amount of assets a firm manages. Emerging Managers generally have less operational resources compared to established firms, making it challenging to mass market their products to a large universe of potential investors. Therefore, LAFPP seeks to enhance its own outreach efforts to identify promising firms and investment opportunities.
In January of this year, the Board adopted the 2025-2027 Strategic Plan, which includes Strategic Goal #2: Enhance Outreach by Promoting Inclusivity and Engagement with Emerging Investment Managers. This goal strengthens the Board’s longstanding Emerging Manager program by broadening our engagement with emerging investment firms when considering investment opportunities.
Investing with skilled Emerging Managers offers LAFPP several advantages. By investing with these managers early in their lives, we secure opportunities to grow with successful managers over the long term. This can be particularly important with capacity-constrained investments like private equity funds where it is difficult to access established, high-performing managers when an investor does not have an existing relationship. In addition, Emerging Managers generally operate with fewer assets under management and may have unique investment sourcing capabilities, allowing them to execute differentiated strategies from established firms.
To maintain the integrity and performance standards of LAFPP’s investment portfolio, Emerging Managers must meet rigorous qualification standards to be considered for a contract with LAFPP. The professionals who operate an Emerging Manager firm must have significant investment experience implementing a thoughtful and repeatable investment process, exceptional past p
erformance records (either in their current or similar past roles), and the ability to service the needs of a large public pension fund such as LAFPP, among other factors. LAFPP selects all investment managers, both emerging and established, based on their proven ability to deliver superior risk-adjusted returns and address the investment needs of the portfolio.
LAFPP selects all investment managers, both emerging and established, based on their proven ability to deliver superior risk-adjusted returns and address the investment needs of the portfolio.
Under California law and the Board’s fiduciary duties, the Board must award all contracts only on the merits, and the Board must award investment contracts
according to the terms of LAFPP’s Investment Policies. When searching for the best investment opportunities, we must ensure that the Board considers the widest range of suitable options. One way we achieve this is by conducting outreach across the Emerging Manager universe, which includes outreach to smaller firms which may be owned by minorities, women, persons with disabilities, U.S. Military veterans, and/or lesbian, gay, bisexual, transgender and queer (LGBTQ) individuals, to educate them about opportunities to compete for contracts with LAFPP. This expanded outreach happens alongside and complements the general outreach we conduct to all interested firms, emerging and established, via traditional means (e.g., advertising in trade journals, screening investment databases, and posting requests for proposals to the City of Los Angeles’ contracting opportunities website, RAMPLA.org).
LAFPP remains one of the most well-funded and well-run pension funds in the country.
Given that Emerging Managers are smaller fir
ms with limited resources, we mitigate potential business risk in our portfolio from investing with Emerging Managers by allocating smaller investment amounts across multiple managers, ensuring portfolio diversification and resilience in case a manager does not perform as expected. As of June 30, 2024, LAFPP had invested/committed $1.8 billion of its $31.3 billion portfolio, or about 5.8% of the portfolio, with 71 Emerging Managers. Additionally, 22 managers who were initially hired as Emerging Managers have successfully graduated from emerging manager status and continue to manage approximately $2.5 billion of total investments/commitments for LAFPP today. Historical performance of LAFPP’s Emerging Managers is on par with investments managed by larger, more established firms.
With a combined funded ratio of 96.8% (as of June 30, 2023) and a 10-year net-of-fees total portfolio return of 7.84% (as of March 31, 2024), LAFPP remains one of the most well-funded and well-run pension funds in the country. Our engagement with and investments in Emerging Managers are an important part of our strategy for success.