Members of the New America Alliance (NAA) knew they had a hot issue when they gathered in August outside Albuquerque to discuss the dismal level of Hispanic participation in public pension funds. Still, it was surprising that the Pension Fund Forum for Latino Legislators resulted in public hearings and policy proposals within two months. An Illinois Senate committee scheduled testimony on pension-fund management in October; meanwhile, pension funds themselves pressed the Securities and Exchange Commission to make it easier for shareholders to nominate director candidates.
At issue is changing the traditional structure of fund management, in which long-established financial service firms keep a tight grip on business, leaving little opportunity for newcomers – among them Hispanic-owned and Hispanic-managed financial firms. In Illinois, for example, Hispanic-owned financial companies manage only 0.001 percent of every dollar in the state's $108 billion pension system, according to state Senator Tony Muñoz, chairman of the recently formed Illinois Senate Select Committee on Public Pension Investments.
Public pension funds are a more than $7 trillion market, points out Martin Cabrera Jr., president of Chicago-based Cabrera Capital Markets Inc. and the NAA member leading alliance participation in the Illinois Senate hearings. "Some people look at minority access to them as a more pressing issue than education," Mr. Cabrera says. "This is not just about Latino businesses making more money. … It empowers us to give scholarships and contribute to nonprofits. Public pension funds are where the wealth and power are. It's big money."
Pension funds act as key sources of equity capital for business investments, says Maria del Pilar Avila, the NAA's executive director. Without participation from financial companies serving Hispanic enterprises, a disproportionately small amount of that capital filters down to the community level. "We [Hispanic workers] are contributing to these funds, and we have a right to have access to this capital," Ms. Avila maintains.
The nonprofit NAA, founded in 1999 after a meeting of 30 Hispanic leaders organized by American CityVista CEO Henry Cisneros and National Council of La Raza CEO Raul Yzaguirre, has an overall goal of making more capital available to expanding and start-up Hispanic companies. "The American Latino community has historically been undercapitalized in every key area of economic and capital availability for business and public purposes," its mission statement says. "Full participation of Latinos in the economic life of the nation cannot be achieved without addressing that undercapitalization."
In the pension-fund issue, the NAA has found a way to realize its goal. Mr. Muñoz's committee in the Illinois Senate examined initiatives to increase pension-fund participation by minority- and women-owned companies and minority and female investment professionals. It has looked at relevant state laws and methods of enforcing diversity among financial service suppliers. The panel invited testimony from pension-plan sponsors, public pension-fund trustees, brokerage houses, and money managers.
Why aren't Hispanic-owned and Hispanic-run companies participating more in managing public funds? "That's what we wanted to find out," says Monika Mantilla Garcia, co-chair of the NAA Capital & Private Equity Committee. Her committee has identified three immediate goals: increase the number of Hispanic-owned financial service companies, increase their access to capital, and increase the number of Hispanics with high-level MBAs who work at these firms.
The NAA created a pension-fund mission statement early this year and then started working on a white paper about the causes of and cures for low participation, according to Ms. Mantilla, who is the New York–based manager of Consultiva Internacional, a financial consultancy based in Puerto Rico.
The white paper was released at the NAA's annual Wall Street Summit in October. Among its conclusions:
•Many Hispanic-owned financial services companies are young, established in the past three to five years. Pension-fund administrators are reluctant to use young companies' services. But "you can perfectly exercise your fiduciary responsibility and still open a fund to new talent," Ms. Mantilla states.
•Because the companies are young, "our networks are fragile," Ms. Mantilla says. "This is traditionally a business reliant on an old boys' network." California and Ohio, however, have begun programs to give more pension-fund business to young companies, she points out.
•In the interests of managing funds for a diverse group of contributors, pension funds should develop clearly articulated action plans and monitoring policies for including a percentage of minority participants in "emerging managers" programs.
•The boards of public pension funds should have an interest in and a plan for inclusion of minorities as directors. In addition, the NAA's Pension Funds Initiative encourages pension funds to consider several steps. •Hire, train, and promote Hispanics to senior management positions in pension-fund organizations.
•Invest in private equity groups that focus on Hispanic-owned companies and those controlled by Hispanic general partners.
•Use Hispanic-owned investment advisory firms for all asset classes, including domestic and international equities, REITs, and hedge funds.
•Urge corporate nominating committees to consider Hispanic representatives for their boards.
•Use Hispanic-owned brokerages and dealers for internally and externally managed funds. Realistically, it won't be easy for Hispanic companies to get a bigger slice of the pension-fund pie, says Jesus Arguelles, owner of Arguelles & Co., an investment banking firm in San Diego. "The pot is so big that changing policies will take years and years," he predicts. "In our community, we're not used to thinking about billions and trillions. Going to Wall Street is a great step, [but] the scale of the challenge to be recognized there in the pension-fund arena is huge." Still, argues Mr. Arguelles, "pension management organizations are becoming aware that management of funds and contributors can no longer be carried out in the old-fashioned way." For example, funds can get more out of their capital with double-bottom-line investing, seeking both financial and socioeconomic returns, and can include more talent by lowering the capital threshold requirements that financial services firms must meet to become involved in pension funds. Change could be evident in three to five years, Ms. Mantilla believes. She hopes that the first crop of Hispanic financial service firms will lead an eventual pack that will include members of the NAA. For Ms. Mantilla, the movement of capital promises a multiplier effect throughout the Hispanic community. "If you look at this from a philosophical perspective, you're building a nation," she says. "The only way the Hispanic community will be able to become fully part of the nation is to create wealth that translates into housing, education, and health care. We know that when we have many successful Hispanic entrepreneurs, they will give back to the community."
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