Examples of institutional investors include federal, state, and local  government, and private retirement plans, endowments, and foundations. Asset Classes and Portfolio Management

Asset management firms registered in the United States manage more  than $70 trillion. Minority- and Women- Owned Asset Managers Face Challenges, but Found Opportunities at Some Nonfederal Retirement Plans and Foundations

According to many asset managers and industry associations with which  we spoke, MWO asset managers face various challenges when  competing for investment management opportunities with institutional  investors, including retirement plans and foundations. According to most asset  managers and industry associations we interviewed, institutional  investors and their consultants often prefer to contract with larger  asset managers with brand recognition or with whom they are familiar. In light of these minimum threshold challenges for MWO firms and  smaller firms in general, many nonfederal plans adjusted  requirements to allow these firms to compete, while noting that they  maintained the same performance requirements for all asset  managers in their selection processes. Specifically, most nonfederal  plans and two foundations either lowered their minimum requirements  for assets under management, length of track record, or amount of  liability insurance to help ensure the requirements were proportional  to the size of the firms, or did not set any minimum or maximum  assets under management threshold levels. Finally, the Pension Benefit Guaranty Corporation did not use  MWO asset managers in 2015, but did retain four MWO asset managers  in 2016. We identified four key practices that institutional investors can  use to increase opportunities for MWO asset managers: establishing and  maintaining top leadership commitment, removing potential barriers,  conducting outreach to MWO firms, and communicating priorities and  expectations about inclusive practices to investment staff and  consultants. Some of the federal entities we reviewed implemented all  these key practices, but others made partial, limited, or no use of the  practices. Almost all of the entities used consultants to some extent in their selection  processes, but some entities relied on consultants more than others. However, the Tennessee Valley  Authority Retirement System has not used the other three practices  (top leadership commitment, outreach, and communicating priorities  and expectations). By fully implementing the key practices, the four entities could widen the  pool of potential candidates in their asset manager searches and help  ensure that they are finding the most qualified firms that meet their  investment needs. In keeping with federal interests, the practices could  also help address barriers MWO firms face and increase opportunities for  these firms. Specifically, the  Army and Air Force Exchange Service, Navy Exchange Service  Command, and Tennessee Valley Authority Retirement System have  used one or more of the key practices to increase opportunities for MWO  firms, but have not fully implemented all of them. Additionally, in keeping with  federal interests, if implemented, the practices could eliminate or mitigate  some of the barriers that MWO firms face and increase opportunities for  MWO firms. (Recommendation 1)
The Chief Investment Officer of the Federal Retirement Thrift  Investment Board should use key practices as appropriate to increase  opportunities for MWO asset managers if and when implementing its  mutual fund window platform. Appendix I: Objectives, Scope, and Methodology

In this report we examined (1) the challenges minority- and women- owned (MWO) asset managers may face when competing for investment  opportunities, and practices used by selected state, local, and private  entities that administer or oversee retirement plans and foundations to  increase opportunities for MWO firms; (2) the major asset classes in  which selected federal entities invested, their use of MWO firms, and the  market presence of MWO firms in these asset classes; and (3) the  policies and processes selected federal entities use to identify and select  asset management firms, and their use of key practices to increase  opportunities for MWO firms. We reviewed federal retirement plans, an endowment, and an insurance  program administered or overseen by eight entities (collectively referred  to as federal entities): Army and Air Force Exchange Service, Federal  Reserve System, Federal Retirement Thrift Investment Board, Railroad  Retirement Board, Smithsonian Institution, Pension Benefit Guaranty  Corporation, Navy Exchange Service Command, and Tennessee Valley  Authority.
Why GAO Did This Study

Asset management firms registered in the United States manage more than $70 trillion. MWO firms manage less than 1 percent of those assets. The federal government has an interest in increasing opportunities for MWO businesses. Questions have been raised about how often federal entities use MWO asset managers and the transparency of their selection processes. GAO was asked to examine, among other things, (1) competitive challenges MWO firms face and how institutional investors address them, (2) selected federal entities' use of MWO firms, and (3) the entities' asset manager selection processes, including their use of key practices. GAO reviewed investment policies and financial statements of 8 entities that manage or sponsor federal retirement plans, an endowment, and an insurance program. GAO also interviewed 14 state, local, and private retirement plans and foundations and 10 MWO asset managers (selected based on size and other factors).

What GAO Found

According to asset managers and industry associations with which GAO spoke, minority- and women-owned (MWO) asset managers face challenges when competing for investment management opportunities with institutional investors, such as retirement plans and foundations. For example, institutional investors and their consultants often prefer to contract with large asset managers with brand recognition and with whom they are familiar. Also, small firms, including MWO firms, are often unable to meet minimum requirements set by institutional investors, such as size (assets under management) and past experience (length of track record). State, local, and private retirement plans and foundations GAO interviewed addressed these challenges in a variety of ways, such as asking their consultants to include MWO firms in their searches. Many plans also lowered their minimum threshold requirements so that the requirements were proportional to the size of the firms while maintaining the same performance requirements for all asset managers in their selection processes.
Federal retirement plans, the endowment, and the insurance program GAO reviewed invest in asset classes in which MWO asset managers have a market presence, but overall use of MWO firms varied. For example, some retirement plans either did not use any MWO firms or did not track this information. The endowment and insurance program reported using some MWO asset managers.
GAO identified four key practices institutional investors can use to increase opportunities for MWO asset managers. These practices are consistent with federal interests in increasing opportunities for MWO businesses.
Top leadership commitment . Demonstrate commitment to increasing opportunities for MWO asset managers.
Remove potential barriers. Review investment policies and practices to remove barriers that limit the participation of smaller, newer firms.
Outreach. Conduct outreach to inform MWO asset managers about investment opportunities and selection processes.
Communicate priorities and expectations. Explicitly communicate priorities and expectations about inclusive practices to investment staff and consultants and ensure those expectations are met.
Some federal entities we reviewed, such as the Federal Reserve System, have used all the practices, but others made partial, limited, or no use of the practices.
The Federal Retirement Thrift Investment Board does not intend to use the practices in its planned mutual fund window platform.
The Navy Exchange Service Command and Tennessee Valley Authority Retirement System used one practice, but have not used the others.
The Army and Air Force Exchange Service has used two practices, and partially used two practices.
By using the key practices, the entities GAO reviewed could widen the pool of candidates in their asset manager searches and help ensure that they find the most qualified firms. In keeping with federal interests, the practices could also help address barriers MWO firms face and increase opportunities for them.

What GAO Recommends

GAO makes four recommendations to increase opportunities for MWO firms, in keeping with federal interests. Four federal entities should use key practices, as appropriate. The Army and Air Force Exchange Service, Navy Exchange Service Command, and Tennessee Valley Authority Retirement System agreed. The Federal Retirement Thrift Investment Board disagreed. GAO maintains that key practices should be used, as discussed in the report.