Coverage: Calpers to cut external fund managers

In a move that is being watching by many on Wall Street, the nation’s largest state run pension fund announced it was getting rid of half its external fund managers. Calpers previously cut it’s hedge fund investments and now is trying to save on fees.

The New York Times had these details in a story by Alexandra Stevenson:

For years, the California Public Employees’ Retirement System, the country’s biggest state pension fund, paid Wall Street billions of dollars to help finance the retirement plans of teachers, firefighters, police and other state employees.

Now Calpers, which has just more than $300 billion of assets under management, plans to cut back drastically on those fees by severing its ties with half of the external investment managers of its funds, according to Ted Eliopoulos, the chief investment officer.

The decision is expected to send ripples through the investment management industry, giving some Wall Street firms a bigger piece of Calpers’s assets to invest while other firms — including some private equity, real estate and global equity funds — could be cut from the portfolio as soon as next month.

Calpers, which decided last year to liquidate $4 billion in hedge fund investments, has moved in recent years to simplify a portfolio that has become complex and expensive as it faces more difficult times ahead. This year, the fund will begin to make more payments to retirees than it receives from its investments. And by 2030, it could be left with a $10 billion shortfall between payments and the total amount of contributions from active workers and income from investments, Calpers said in a presentation in May.

Timothy W. Martin wrote for The Wall Street Journal that the move to reduce fees could become a trend for the industry:

The push by Calpers to downsize could have broader ramifications beyond its own portfolio. Calpers is considered an industry bellwether because of its size and history as an early adopter of alternatives to stocks and bonds, and the shift could prompt other U.S. pensions to scale back their ties to Wall Street.

“There really will be a significant amount of discussion at other pensions” about whether they should cut external managers in the wake of Calpers’s decision, said Allan Emkin, a managing director at Pension Consulting Alliance who has advised the fund since the 1980s.

The pullback would take place over the next five years and is expected to save Calpers hundreds of millions of dollars in management fees. It paid $1.6 billion to external managers last year.

The reduction in outside managers won’t fundamentally change Calpers’s investment strategy, or the percentage of assets managed in-house versus externally. The remaining 100 or so outside managers will simply get a bigger pool of funds varying from $350 million to more than $1 billion, Mr. Eliopoulos added.

The goal, Mr. Eliopoulos said, is “to gain the best deal on costs and fees that we can.”

Alison Vekshin wrote for Bloomberg that the move would slash private-equity managers by 70 percent and put some big names on the chopping review:

The fund will reduce the number of private-equity managers to about 30 from 100, Eliopoulos said.

Calpers invests with private-equity heavyweights including Blackstone Group LP, Apollo Global Management LLC, and Carlyle Group Inc. Private-equity funds have generated $31.4 billion in profits for Calpers since it began in 1990 through the end of September, according to its website.

Fees charged to companies and clients by private-equity firms have come under scrutiny by the Securities and Exchange Commission as regulators review the industry, an outcome of the 2010 Dodd-Frank law passed after the financial crisis.

“We’ll be using the same criteria and processes that we have in place today to evaluate and monitor not only our current managers but to identify and select new managers going forward,” Eliopoulos said.

Jonathan Berr wrote for CBS that some argue the fess could be justified if the returns are there:

According to the Center for Retirement Research at Boston College, Calpers pays among the highest fees of any U.S. public pension fund, equaling about $2.7 billion in 2013. As a percentage of its assets, that works out to about 100 basis points. That’s well above the 40 basis points that most pension plans pay.

“Higher fees may be warranted if you’re getting returns that support the higher payments you’re making,” Jean-Pierre Aubry, the center’s assistant director assistant director of state and local research, told CBS MoneyWatch. “You’re looking for returns net of fees to figure out if these are worth it or not. Clearly, California thinks they can do better.”

Given its huge size, when Calpers makes a move, it’s closely watched by other public pension funds such as New York City’s and Pennsylvania’s, two funds where officials recently lamented the amount of fees they have to pay to managers. Pension plans want these funds to perform better than they could have done had they invested in a low-cost index fund that mimics the broader market, according to pension consultant Howard Pohl of Bogdahn Group.

“They’re big enough to afford whatever they want of afford,” he said of Calpers in an interview with CBS MoneyWatch. “The vast, vast majority of funds can’t do that.”

Because they are in charge of public money, the move is likely one that will make regulators, government officials and those paying into the fund quite happy. Calpers is one of the biggest in the industry and many will likely try to emulate the move. It’s also probably causing many relationship managers to lose some sleep as they prepare their pitches and arguments for remaining on the payroll.