PENSION BENEFIT GUARANTY CORPORATION 1 PILOT PROGRAM REVIE W 

Review of the PBGC 

Smaller Asset Manager 

Pilot Program 

May 2018 
PENSION BENEFIT GUARANTY CORPORATION 1 PILOT PROGRAM REVIE W 

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REVIEW OF THE PBGC

SMALLER ASSET MANAGER PILOT PROGRAM

The Pension Benefit Guaranty Corporation (PBGC) established the Smaller Asset Managers Pilot

Program (SAMPP) to provide opportunities for smaller investment management firms to manage

some of the agency’s fixed income assets. Performance measurement for investments under the pilot 

program began August 1, 2016. This report summarizes PBGC’s experience thus far under the pilot 

program. The report provides investment return performance (net of fees) of the pilot program

relative to a benchmark and to non-pilot program fixed income asset managers. It also describes the

program structure, observations and lessons learned thus far. 

PBGC is submitting this report to the Committee on Appropriations of the Senate and the

Committee on Appropriations of the House as required by Division H of the Explanatory Statement

of the Consolidated Appropriations Act, 2018 (Pub. L. 115-141), incorporating House Report 

115-2441 and Senate Report 115-150.

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BACKGROUND

PBGC uses institutional investment management firms to invest its assets, subject to PBGC’s 

oversight and consistent with the investment policy statement approved by PBGC’s Board of 

Directors (Board). PBGC does not determine the specific investments to be made, but instead relies 

on PBGC’s investment managers’ discretion in executing investments appropriate for their 

contractually assigned investment mandates. PBGC does ensure that each investment manager 

adheres to PBGC’s prescribed investment guidelines associated with each investment mandate and 

measures each investment manager’s performance in comparison with agreed-upon investment 

benchmarks.

In August 2014, the Board asked PBGC’s Advisory Committee to provide recommendations to 

address the lack of inclusion of smaller asset managers and to expand diversity in its portfolio by 

increasing the number of investment ideas, approaches and management teams. The Board then 

1 “The Committee directs PBGC to submit a report to the Committees on Appropriations of the House of 

Representatives and the Senate within 180 days of enactment of this Act that includes an evidence-based 

review and assessment of the Smaller Asset Manager Pilot Program. The report should include performance 

comparisons of pilot participants and non-pilot PBGC asset managers, after fees, relative to their portfolio 

benchmarks, and should identify best practices and lessons learned that could be applied at PBGC and other 

Federal pension and retirement benefit systems.” 

2 “The Committee recognizes PBGC’s ‘‘Smaller Asset Managers Pilot Program’’ to ensure that smaller and 

more diverse investment management entities more effectively compete for investment allocations. The 

project, announced in 2015 and now underway, provided access to smaller allocations ranging from 

$50,000,000 to $250,000,000, creating new opportunities for smaller asset managers to participate. Similarly, 

several States have established programs to encourage greater participation by smaller and diverse asset 

management entities, and studies have found that women and minority-owned firms have achieved at least 

comparable performance, both in terms of absolute returns and risk-adjusted returns, as the rest of the market. 

The Committee directs the PBGC to provide by December 31, 2017, an interim update on the performance of 

the pilot program, as well as a written account of additional steps that can be explored to expand opportunities 

for smaller and diverse asset management entities.”
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directed PBGC to develop a pilot program to address these goals. PBGC staff, with the assistance of

the Advisory Committee, assessed industry best practices in this area and developed 

recommendations on how such a smaller asset manager program might be established. 

PBGC announced the Smaller Asset Managers Pilot Program (SAMPP) in May 2015. The program 

seeks to reduce competition barriers faced by asset managers that do not have multiple billions of 

dollars under management, while maintaining rigorous investment risk and control standards. PBGC 

selected US Core Fixed Income as the initial asset class for the pilot because research showed that 

there was a higher probability of finding smaller managers that could add value relative to the 

benchmark return compared to other asset classes. Additionally, the majority of PBGC’s assets are 

invested in fixed income. 

In developing parameters for the program, eligible firms were required to have a minimum of $250 

million in assets under management, a five-year performance history, and undergo the same 

competitive evaluation as other PBGC money managers. The procurement was open to all managers 

that met the minimum assets under management (AUM) requirement. Additionally, PBGC limited 

allocations to no more than twenty percent of a firm’s AUM, which is in keeping with industry 

standards. Ultimately, in June 2016 PBGC selected five firms for the pilot program that would be 

expected to outperform the portfolio benchmark (BBG Barclays Aggregate Bond Index) over a full 

market cycle of highs and lows at an acceptable level of risk. Each of the selected firms was allocated

$175 million, with performance management beginning on August 1, 2016.

PBGC adopted a plan to analyze the implementation and operation of the pilot program after one 

year; and to analyze the performance of the firms after five years, which is the industry standard. 

Five years is considered to be an appropriate period of time to determine whether a manager is 

successful because historically, on average, market cycles last approximately five to seven years. To 

fully evaluate a manager’s performance track record, it must demonstrate its capabilities in the variety 

of market environments that encompass a market cycle. Investment managers have unique areas of 

expertise with strategies that often result in managers performing differently in varying market 

conditions. For this reason, a full market cycle is necessary to allow each manager the opportunity to 

demonstrate their skill in varied market environments. 

ANALYSIS AFTER FIRST YEAR

The following analysis of the SAMPP after the first year includes structure, due diligence, 

performance, and resource factors. 

PROGRAM STRUCTURE:

PBGC designed the program for hiring of smaller asset managers in an asset class where active 

management has historically added value. This is reflected in the relative performance of its Core 

US Bond Composite returns. The successful hiring of small asset managers was a result of the 

asset class, the program parameters, and the procurement process.

• Asset Class: Core US fixed income was chosen because inefficiencies exist in the asset class 

that allow for the success of active management. In contrast, the U.S. public equity sector of 
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the market is highly efficient, making value added performance from active management

more difficult, by either large or small firms. This is reflected in the current position of the 

PBGC domestic equity portfolio, which is entirely passively managed via use of index funds. 

Additionally, the risk (volatility) of equities is greater than the risk of Core US fixed income.

An active international fixed income allocation applied to a smaller manager framework is 

not feasible, because those asset classes require a large infrastructure to cover the breadth 

and complexity of those markets. There are other segments of the market, such as private 

equity and private real estate, for which the PBGC investment policy statement does not 

allow an active allocation. PBGC’s private market assets consist entirely of assets inherited 

from terminated pension plans. 

• Program Parameters: In designing the SAMPP to accommodate smaller mangers, the PBGC

lowered both insurance requirements and the minimum assets under management required 

to bid on this PBGC investment contract.

• Procurement Process: The cooperation of multiple PBGC departments was needed to make 

the search process efficient. The Corporate Investments Department (CID), the 

Procurement Department (PD), and the Office of General Counsel (OGC) worked together 

to meet timelines and successfully implement the pilot program. The effective collaboration 

was evident in a successful pre-bidder’s conference at which PBGC staff described federal 

procurement rules for prospective managers.

DUE DILIGENCE:

• Deliverables: The same due diligence framework that is applied to PBGC’s larger fixed 

income managers is utilized for the SAMPP managers. Managers have monthly, quarterly 

and annual deliverables. However, because of resource constraints at these firms, CID staff 

has had to work with some of the firms to bring their reporting practices up to the same 

standards as the larger firms. Examples where enhancements were necessary included 

tracking error and attribution reporting, which provide CID staff information on both the 

extent to and the reasons why a manager’s performance deviates from its benchmark. 

Currently, the managers are all providing the required information. 

• Meetings: In addition to the periodic deliverables, CID conducts two due diligence meetings 

each year at six-month intervals, one on-site at the manager’s office and the second at 

PBGC’s office. Each of the SAMPP managers participates in the semiannual due diligence 

meetings and all are able to provide all required information.

• During the first year of the program, one of the five SAMPP managers had a guideline 

violation. The violation was the result of an error related to the new-account set-up process 

in which guideline restrictions are programmed into the investment manager’s trading 

system. As a result, the manager has separated the roles of Chief Compliance Officer and 

Operations Manager. CID staff reported this guideline violation to the PBGC Advisory 

Committee and Board of Directors through its normal process. PBGC’s experience is that 

new-account set-up issues are not uncommon. The manager compensated PBGC for a 

small loss resulting from the trade error.

• Regarding manager reporting, one area that needed clarification was the communication of 

organizational changes that occur between reporting dates. CID needs to be informed about 
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significant organizational changes as soon as possible. Examples of such changes include 

staff departures/additions and client losses. At this point, all SAMPP managers understand 

CID’s expectations and inform CID of such changes as they occur.

PERFORMANCE:

As of July 31, 2017 (one year after initial allocations), each of the five smaller managers generated 

net-of-fee returns in excess of the established benchmark. In the aggregate, the program generated a 

one-year return of -0.12% as compared to a -0.51% return for the benchmark. The negative returns 

for this period are a function of rising market interest rates generally, not the asset managers’ 

performance. CID believes that not enough time has passed to make meaningful comparisons of the 

SAMPP to its larger US Core managers, which may have strategies that perform differently at this 

stage of the economic cycle.

The table below reflects the one-year net-of-fee performance for the SAMPP Composite, the 

benchmark, and the PBGC Core US Bond Composite: 

Investment Performance (One Year)

One Year*

Difference from 

Benchmark

SAMPP Composite -0.12% 0.39

BBG BARC Aggregate Bond Index -0.51%

PBGC Core US Bond Composite 0.40% 0.91

* Net of fees as of 7/31/2017

Inception-to-date performance versus the benchmark through February 2018 shown below is not 

materially different from results shown in the table for the one-year period ending 7/31/17. 

Investment Performance (Since Inception)

Since Inception*

Difference from 

Benchmark

SAMPP Composite -0.73% 0.42

BBG BARC Aggregate Bond Index -1.15%

PBGC Core US Bond Composite -0.38% 0.77

* From SAMPP inception date 8/1/2016 through 2/28/2018, net of fees. 
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RESOURCES:

The SAMPP required additional staffing resources. Specifically, CID currently allocates two of its 18 

FTE staff approximately half time to the project, along with management supervision.

OBSERVATIONS/LESSONS LEARNED

Observations and lessons learned from the program to date include:

• Identifying the right asset class was important to a successful and efficient search process, 

and maybe to the performance of the managers. As described in the analysis, core US fixed 

income was chosen because inefficiencies exist in the asset class that allow for the success of 

active management. 

• The pre-bidder’s conference was well received and proved helpful in describing the federal 

procurement rules for managers who were unfamiliar with the process.

• Tailoring the Request For Proposal (RFP) to more accurately address the potential strategies 

of smaller, niche asset managers made the evaluation process more efficient.

• The smaller managers have had issues with meeting PBGC reporting requirements, because

smaller managers typically have fewer resources. PBGC staff have been able to collaborate 

with smaller manager staff to bring their reporting in line with requirements.

• Smaller managers generally have a higher asset concentration per client, which increases the 

firm’s operational risk to investors. CID strives to develop an understanding of current 

clients of the firm (when disclosure is not prohibited), which allows PBGC to better assess 

areas of potential risk. One smaller manager had a few sizeable accounts leave the firm, 

which CID discussed with the manager. CID continues to closely monitor the asset levels of 

the manager since it has been identified as an area of risk.

FUTURE CONSIDERATIONS

While not enough time has passed to fully assess the performance and skill of the managers, early 

results are encouraging. The managers in the program have done well relative to the benchmark to 

date. We will continue to monitor the program and assess it over the full five-year market cycle as 

planned. 

At the end of the five-year period, the success of the program will be evaluated and future options 

considered.