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Pensions Squeezing GPs on Fees?
James Nash and Stacie Servetah of Bloomberg report, California, New Jersey Pensions Squeeze Fee Savings:
Pension
system investment directors overseeing more than $217 billion in
California and New Jersey cut millions of dollars in projected costs by
reducing the fees they pay to asset managers.
The
$146.4 billion California State Teachers’ Retirement System, the
nation’s second-largest public-pension fund, has reduced the fees it
pays to money managers by an average of 15 percent since June 2009,
Chief Investment Officer Christopher Ailman said yesterday in a board
meeting. In New Jersey, the pension-investment manager said it
negotiated at least $40 million of fee and expense cuts during the next
five years.
Pensions around the nation are grappling with
unfunded liabilities estimated at more than $3 trillion in a 2010 study
by Professors Joshua Rauh and Robert Novy-Marx. Recession losses still
haven’t been fully recouped. In December, the California fund was valued
at 9.7 percent less than in June 2008, when it had assets of $162.2
billion. Plans have dialed back management fees as they try to rebound.
“We’re
trying to drive that lower,” Ailman said of the fees charged by
private-equity fund managers, which often amount to 2 percent of assets
and 20 percent of profits. Partly, the fund is trying to make sure it
isn’t covering costs that the managers should pay, he said at the
meeting in West Sacramento.
“We’re very focused on what expenses
the general partner bears as opposed to the limited partners,” Ailman
said. In September, the California fund said its 2009 management
expenses were $139 million less than projected.
Focus on Profit
The
pension has reduced annual management fees paid to private-equity firms
since July 2009, Ailman told the plan’s governance committee. He said
the objective was to get investment managers to focus on increasing the
plan’s profit.
The pension spent $617.7 million on asset-management fees in 2009, according to a September report. As of June 2009, the plan listed 847,800 members and beneficiaries on its website.
In
New Jersey, Timothy Walsh, director of the state Treasury Department
division that manages pension investments, said officials are seeking
additional savings beyond the $40 million already negotiated with
alternative-investment funds.
“Once negotiations are complete,
the state will realize at least $50 million in secured savings over the
next five years,” Walsh said yesterday in a statement.
Fee Reductions Sought
The
New Jersey division sought fee and expense cuts from private managers
after paying $125 million last year, Walsh said in October. Alternative
investments also include hedge funds, real estate, commodities,
infrastructure and bank loans.
New Jersey has fewer than 20
alternative-investment advisers and isn’t identifying them, said William
Quinn, a spokesman for the Treasury Department. Quinn declined to
disclose the new terms of its agreements with the managers.The
savings are spread equally over five years, for annual reductions of
about $8 million, Quinn said. The fee reductions coincide with proposals
from the division to increase the maximum share of holdings that can be
placed in alternative investments to 38 percent from 28 percent, Walsh
said.
The division manages investments for seven pension funds
that provide benefits to about 800,000 working and retired teachers,
police officers and government employees. As of Dec. 31, the division
said pension fund assets were valued at $70.8 billion, with about $12.1
billion allocated to alternatives.
Funding Gap
New
Jersey’s unfunded pension liability rose $8.05 billion, or 18 percent,
to $53.9 billion as of June, Treasurer Andrew Sidamon-Eristoff said in
December. The state has failed to make pension contributions since
fiscal 2008, when it paid $1 billion under former Governor Jon Corzine, a
one-term Democrat.
Governor Chris Christie, a Republican who
took office in January 2010, skipped a $3 billion pension payment for
the fiscal year that began July 1 to help close a $10.7 billion budget
deficit. He has said he would restart payments into the system with a
partial contribution of $512 million this year if the Democratic-led
Legislature acts on his proposals to scale back benefits.
In
their study of state and local government pensions, Northwestern
University’s Rauh and the University of Rochester’s Novy-Marx estimated
states’ unfunded pension liabilities at about $3 trillion, based on
Treasury discount rates. They extrapolated another $574 billion in
uncovered local-government obligations, based on an examination of 77
plans.
Some thoughts on this article. It always
struck me as odd how hedge funds and private equity funds were able to
collect 2% management fee and 20% performance fee. To be sure, some
deserve it, but most don't. You should be paying 2 & 20 for real
alpha, not leveraged beta. If pension funds are doling out mega fees
for "alternatives", they should stop and think, is it worth it? Can they
replicate certain strategies internally at a fraction of the cost?
I know they can but to do this they have to attract qualified people
and pay them. CalSTRS doled out $618 million in asset manager fees in
2009 and New Jersey paid out $125 million in fees last year. That's fine
if they're niche or complimentary strategies that cannot be replicated
internally, but I suspect that a lot of strategies can be replicated
internally at a fraction of the cost. This includes enhanced indexing,
fundamental stock picking, L/S equity, merger arb, convertible bond
arbitrage, TAA, direct private equity deals and co-investments.
Think
about it, $618 million and $125 million is a lot of dough. The problem
is that most US public pension funds are scrutinized so they have ridiculous
compensation systems. This forces them to go to outside managers and
dole out huge fees because they can't attract competent people to do the
job internally at a fraction of the cost.
So now pensions are squeezing GPs on fees. It's only
normal since they're trying to control costs. I just think
there are smarter ways to control costs than squeezing GPs on fees.
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You see Leo, hedge funds are a greedy lot and prone to leverage and risky bets to justify their magic. Therefore not a solution to pension fund plight. It seems long term investing is out; short term trading, insider info, shorting and derivatives are in. We are in trouble stemming from new paradigm created by Greenspan and new breed of bankers dragging country into bank-rupcy
Welcome to the world of hostage and terrorist pension management. Give in to my demands or I will blow your head off.
As for those 2 & 20 asset managers, I would fire them all first and then start talking about fees. How can anyone justify a fee structure like that in a market where your average T-Bill portfolio is earning 2.5%, at best. Many of these funds are prevented by law from holding anything much riskier than T-Bills and broad bond and stock portfolios anyway. The pension funds don’t require sophisticated avant-garde management strategies. What they require most is for the state benefactors to simply provide the funds they promised. If that had been the case during the last ten years, these state pension funds would be much better off now even if they had stored all the money in a warehouse.
Cities and states should just get out of the pension business. Liquidate what's there and let the beneficiary invest it.
No dont worry geezer. Your voting block has successfully transfered all sacrifices and cuts in benefits and govenment services to the younger generations.
Way too little too late, pension funds are goin' down, or they'll be bailed out with debased dollars, not much better, or be confiscated outright, way more likely.