Two of the best US equity mutual funds are Ariel and Ariel Appreciation Fund, according to Morningstar and Lipper. They specialise in undervalued small-cap and medium-cap companies in ‘consistent businesses’: so they haven’t invested in high-tech and dot-coms, but they also don’t invest in the tobacco, defence or nuclear industries. That’s why they are considered ‘ethical’ funds. But this is not the only special feature of Ariel Capital Management, based in Chicago: with $7.8bn (E8bn) assets under management, it’s also the largest African American-owned investment firm, according to the magazine Black Enterprise. Many of its clients are institutions, including the California State Teachers’ Retirement System (CalSter), the board of pensions of the Presbyterian Church (USA) and the W K Kellogg Foundation Trust. The question is: did these institutions hire Ariel for its track record or for its colour?
Actually, both elements are important and Ariel’s success is representative of a trend in the US pension industry in favour of women and minority-owned asset management firms. The trend is more popular with public pension funds, where politics plays a big role; and it’s more spread along the Pacific Coast, where new philosophies are often born. From Seattle to San Diego, many retirement systems have decided to diversify their external money managers hiring ‘emerging’ firms and especially women and minority-owned ones.
The last fund to announce such a strategy was the Seattle City Employees’ Retirement System in June 2002. The biggest one is the famous CalPers (California Public Employees’ Retirement System), which in 1998 launched the Manager Development Program (MDP) “to provide venture capital and investment funds to emerging firms in exchange for a significant but minority equity stake in the selected firms”. The most distinctive is the City of San Diego’s pension fund: it has almost a quarter of its assets at emerging firms and it used to have an internal money manager who was Native American, Robert Snigaroff. In 2001, he left to found his own investment company, Denali, which currently works for SDCERA (San Diego County Employees Retirement Association) and CalPers.
The trend is not a smooth one. Last January at the fifth annual Wall Street Project Conference the Reverend Jesse Jackson said that in 2000 minority-owned firms collected just 0.2% of the total fees paid for asset management by the top 200 companies in the Fortune 500 (according to the last data available and gathered by Utendahl Capital Partners for the conference). Jackson claimed that they should receive 10% of asset-management fees for managing corporate pension and 401(k) money, because they ‘have qualified money managers’. His efforts to promote African-American money managers are organised via the Rainbow/PUSH Coalition’s Wall Street Project and sometimes deliver results. For example in 2000 the air-defence company Raytheon became an official sponsor of Jackson’s Project and decided to entrust 5% of its pension fund assets to women-owned and African American-owned management firms. Among the minority-owned firms chosen by Raytheon were NCM Capital Management Group (Durham); MDL Capital Management (Pittsburgh) and Ariel.
Nevertheless, Ariel does not boast its black colour: its website never stresses this fact, although you can see it from the pictures of its managers and staff, starting with the founder John Rogers. On the contrary Snigaroff stresses his roots as an Alaskan native (Aleut tribe) and has chosen an Indian name for his firm: Denali is the Athabascan Indian word for ‘the high one’ or ‘the great one’.
Lack of past performances or the small size are often the reasons why women and minority-owned firms are not included in traditional manager searches. On the other hand, looking for them may have its rewards. Eager to win business, minority-owned firms often price their services aggressively and when they win an account, they do their best to impress their new clients with service, plan sponsors say. Minority managers themselves want to avoid any appearance of trying to capitalise on affirmative action goals and prefer to discuss their professional skills. So, what are their records?
Ariel’s performance, as already mentioned, is excellent. Denali is performing a little better than the benchmark CalPers fixed for its US large cap value equity portfolio: -8.9% against
-10.46% in the 12 months ending June 30, 2002. But among the MDP managers there is also the women owned Philippe Investment Management (New York), which specialises in international equities and heavily underperformed its benchmark: -15.01% against -9.34% over the same period. In all, the MDP is doing fine, according to the last CalPers report: over the same period the total programme (which includes also ‘white male’-owned firms) outperformed its custom benchmark by 1.29%; since the inception date, May 31, 2000, through June 30, 2002, it has underperformed its custom benchmark by -0.93%. With MDP CalPers has invested so far $1.750bn with two partners: Strategic Investment Management and Progress Putnam Lovell, two consultants that specialise in selecting emerging managers.