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Powerful gatekeepers tell the $70 trillion institutional-investor community what to do when their money managers make headlines for the wrong reasons. They could be holding the industry back.

  • When drama breaks out at the world’s largest asset managers, big clients have to make tough choices.
  • A group of quiet but powerful advisors helps decide what to do when controversies arise.‌ ‌ ‌
  • Often they advise doing nothing — but as calls for equity grow, there is more pressure to act.
  • See more stories on Insider’s business page.

If a fund manager winds up in the news for the wrong reasons, institutional investors must decide whether to stand pat, put the manager in a penalty box, or fire them altogether. 

Behind the scenes, a quiet but hugely influential group often holds sway over how these investors — who collectively control some $70 trillion in investable assets on behalf of retired teachers and firefighters, university endowments, charities, hospitals, and more — react.

Investment consultants, the gatekeepers who advise institutional investors on where to put those trillions, play a major role in advising these large pools of capital on whether to hire, fire or watch-list money managers in crisis mode.

The consultants, including industry giants like Mercer, Aon, Cambridge Associates, and Callan, take fees for their advice, adding up to big business — consultants can fetch anywhere from hundreds of thousands to millions of dollars annually from each of their largest investors. Some of their clients are understaffed public pensions, and they lean on their consultants to offer asset-allocation advice, scrutinize managers’ performance and fees, and help them with manager hiring and firing decisions, among other services.

This advice has been especially important in recent years, during which institutional investors have confronted a host of due-diligence dilemmas, including:

  • another’s abrupt resignation after an inquiry into his financial ties with Jeffrey Epstein.

But more often than not, industry watchers say, investors and their advisors simply do nothing when the asset managers they’re invested in find themselves embroiled in controversy.

Sometimes this is because they want to wait and see how legal battles play out, or they might be wary of the price tag associated with finding a new money manager and transitioning those assets. They also might not want to deal with the headache of trying to get out of investments that are locked up for a long time, sources said. 

Or maybe the institutional investors just don’t want to dump a fund manager who’s driving strong returns.

But there’s evidence investors are beginning to change tack. Two treasurers of California foundations recently called on their peers to fire consultants and money managers who are resistant to diversity and inclusion efforts, according to an article in the Stanford Social Innovation Review. 

“Foundations that want to make progress must be prepared to fire resistant advisors,” wrote authors Tracy Gray and Emilie Cortes. “If boards vote with their feet, advisors will pay attention. Foundations should instead find an advisor or consultant who is committed to diversity and add a racial equity mandate for anyone they work with.”

Consultants who prefer to stay neutral on these types of controversies could soon be in for a rude awakening.

Liz Simmie, cofounder of a small Toronto-based environmental, social, and governance-focused asset manager called Honeytree Investment Management, said that while many investment consultants are pushing money managers to disclose workforce diversity data, “they aren’t firing managers for toxic behavior or lack of action on equity.” 

“It’s really the traditional consulting industry dragging everyone back,” Simmie said. 

Almost all of the consultants contacted by Insider for this story declined to comment or did not respond. You can read the full list of responses at the bottom of this story.

‘Unfavorable’ news at Pimco and BlackRock

Two investment consultants, Westwood, Massachusetts-based Meketa Investment Group and Boston-based NEPC, are among the few known for taking action on social issues, Simmie and a consultant-relations executive both said. (Consultant-relations executives at money managers work to build and maintain relationships between their firms and the consultants, as they research investment firms to rate or recommend their funds.) 

For example, when billionaire money manager Ken Fisher made lewd and sexist comments in front of a crowd at an industry conference in October 2019, Meketa and NEPC responded. Meketa recommended to a public-pension client that it place Fisher Investments on watch (it recently advised the same client to remove Fisher from the watch list). And Boston-based NEPC recommended that its clients terminate the money manager, CNBC reported at the time.

Ultimately, clients pulled a combined $4 billion from Fisher Investments in the month that followed, Bloomberg Businessweek reported last year. Fisher Investments spokesperson John Dillard said the firm’s assets have grown 60% since the incident, to $178 billion. 

NEPC formed what it called an “unfavorable-news committee” in 2018 to deal specifically with issues that might be unrelated to investment-management operations. In January this year, Meketa unveiled a new initiative to enhance its process for rating money managers on the basis of their corporate diversity and inclusion efforts, assessing their commitment to reporting diversity statistics and ensuring pay equity, among other measures. 

Both were in the news again when harassment and discrimination claims against Pimco came to light. Both consultants recommended to at least one pension client that the money manager be placed on watch, Insider reported last month. 

Bond giant Pimco is embroiled in an ongoing lawsuit brought by five current and former female employees. The $2.2 trillion Newport Beach, California-based money manager has denied the plaintiffs’ claims, but the firm has faced similar lawsuits in recent years.

In April 2018, Stacy Schaus, then an executive vice president and head of Pimco’s defined-contribution practice, filed a lawsuit alleging gender- and age-based discrimination at the money manager. Schaus left Pimco in November 2018, and the suit was ultimately settled. 

Pimco is also battling an ongoing lawsuit filed in September 2019 by Andrea Martin Inokon, one of its senior in-house lawyers, who sued the firm for gender, racial and disability discrimination.

BlackRock is also facing accusations from current and former employees of discrimination and harassment. One former employee, Essma Bengabsia, who worked as a full-time analyst at the $9 trillion money manager until May 2019, publicly alleged in a Medium post that she was sexually harassed and faced discrimination from colleagues based on her sex, race, and religion. 

Pimco and BlackRock declined to comment for this story. 

The San Joaquin County Employees’ Retirement Association fund put Pimco on watch based on Meketa’s recommendation in March. NEPC also recently recommended that a client, the Alameda-Contra Costa Transit Employees’ Retirement Plan, put Pimco on watch over ongoing claims.

Sit back and wait 

Pimco and BlackRock investors who spoke with Insider said they understand why most consultants are reluctant to take action based on allegations still under investigation or in litigation.

An official at a public fund, which is invested in both Pimco and BlackRock, said the pension wants to wait until investigations at the firms are finalized, which could take “a long period of time.” 

“Are we monitoring them? Yes. Have we taken any action? No,” the official, who spoke under the condition of anonymity, said of both money managers. 

“Pimco and BlackRock do a wonderful job for us,” the person added.

This official took a far different approach with Pimco back in 2014, when the cofounder and legendary bond manager Bill Gross abruptly left the firm. The client flew to Newport Beach to meet with Pimco leadership and ended up putting the firm on watch for at least two years. 

“That was a big change at the time and caused us to even more closely monitor them,” the official said. 

Another BlackRock client, who spoke under the condition of anonymity, said their stance is similar to their consultant’s: Recent reports about the firm are “troublesome” but are still allegations. But the reports raise other issues. 

“You still have the potential of management distraction,” this person said. “We are concerned about the possible risk to investments, if their attention is redirected to the allegations and away from the investments.”

The added cost of going out and searching for a new manager, and the risk of their investment taking a hit if they exit at an inopportune time in the markets, is also cause for concern, the BlackRock client said. “And that’s all while not knowing that this manager will be any better than the last one.”

When the nuclear option isn’t an option

Private-equity investors are perhaps in the toughest spot when it comes to bailing out of an asset manager because their money is locked up for far longer, the BlackRock investor pointed out. 

Investors in the private-equity firms Apollo Global Management and Vista Equity Partners have largely stayed put, despite scandals attached to their founders, reporting by Insider has revealed. 

In January, Apollo announced the results of an independent investigation that showed the full extent of then-CEO and cofounder Leon Black’s financial ties to the convicted sex offender Jeffrey Epstein, disclosing in a report that he had paid Epstein $158 million for financial advice. On March 22, Black abruptly stepped down as CEO, several months earlier than his previous plan to retire by July 31, and said he would no longer serve as board chairman after his exit. 

In February, Black’s successor, Marc Rowan, said that management and governance changes underway at Apollo had appeased large limited partners who stuck with the firm.

Similarly, when the Vista Equity Partners founder, chairman, and CEO Robert Smith reached a nonprosecution agreement with the government in October after admitting to tax evasion, some  investors expressed concern — but the negative press hasn’t dented the firm’s fundraising efforts, Insider reported last month. 

“It’s easier to liquidate a portfolio in public markets,” the BlackRock investor told Insider. “You could liquidate that tomorrow. If you’re talking about a private investment, that could be costlier, and it takes time, and you’d have to sell it on the secondary market.” 

Investors who have committed to private-equity funds but haven’t written a check yet can back out — as was the case with the New Mexico Educational Retirement Board, which oversees the state’s $14 billion pension fund for public-school and higher-education employees. The pension reversed course on a planned $100 million investment with Vista after news of Smith’s tax-evasion concerns, Insider reported at the time.

The pension’s investment consultant conducted due diligence on Vista before the planned investment, public investor documents show. That consultant? NEPC. 

‘Good people run away screaming’ 

As money managers face mounting pressure to align their own diversity, equity, and inclusion practices with institutional investors’ goals, the demands on investment consultants from their end clients will grow, sources said.

“There has been a noticeable increase in focus with regard to diversity, inclusion and equity over the past year, particularly from public funds and consultants,” said Jack Coan, the head of consultant relations for North America at Ninety One, the fund manager formerly known as Investec Asset Management, in an email.  

“And it’s not simply more attention, but a demand for greater substance,” Coan wrote. “Aspirational themes alone are no longer sufficient. Investors now require, and deserve, transparency.” 

In March, BlackRock told employees in a company town hall that it would begin to more closely link managers’ compensation to diversity, equity and inclusion efforts, as well as reward managers for improving retention of employees from underrepresented backgrounds, among other steps to improve diversity. 

Last month, BlackRock CEO Larry Fink also told employees in a memo that the money manager had hired law firm Paul, Weiss, Rifkind, Wharton & Garrison to do an internal review of employee-misconduct claims. 

In instances where the industry’s diversity problems and accusations of workplace toxicity reach the level of misconduct, consultants should thoroughly investigate those claims, according to one industry expert.

Kenneth H. Springer, CEO of Corporate Resolutions Inc., a New York firm that does due diligence and background investigations for clients that include institutional investors, said that investment consultants with the resources to do the digging should be investigating claims of toxic cultures at money managers they recommend.

“If they have the ability to do the type of work we do, with the same kind of expertise, then it probably is appropriate that they advise a pension fund or endowment on whether they think a specific manager’s culture and values align,” Springer said. “You have to make sure you’re not just looking at the HR policies. Nobody is going to come out and say, ‘We have a really toxic environment here.'” 

Simmie took things a step further, noting that Wall Street risks losing its key asset if it continues to leave calls about toxic workplaces unanswered.

“The consultants and investors don’t know what to do, or they don’t do anything about it. They don’t realize that disclosure is the important thing,” Simmie said. “The problem with toxic cultures is that people leave. Good people run away screaming. It matters to the bottom line.” 

Several prominent consultants — including Aon, Cambridge Associates and Callan — declined to comment for this story. Another prominent consulting firm, Wilshire Associates, also declined to comment, while Russell Investments, another consulting firm, did not respond to a request for comment. Consulting giant Mercer declined to comment specifically on the issues raised in this story but sent links to white papers and blog posts it has written on how diversity and inclusion affect its manager ratings.

Meketa declined to comment for this story, while NEPC did not respond to a request for comment. 

The investment consultant Willis Towers Watson declined to comment on the specific claims at BlackRock and Pimco through a spokesperson, but an executive at the firm offered a statement on its due-diligence process — the only consultant to do so for this story: 

“Culture, inclusion and diversity are an integral part of our due diligence process and elements we believe critical to an asset manager’s long-term success,” Nimisha Srivastava, global head of credit at Willis Towers Watson, said in an email. “As such, we spend significant time assessing not only the current state of diversity at managers but also their short and longer-term goals to improve culture and diversity over time.”

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