Monday, November 25, 2013

Money Management Bonanza

Money Management Bonanza

Most public employee pension plans end their fiscal years on June 30, and it takes about four or five months to issue the annual report.  The first reports are being published, and they have a story to tell.  On Friday, I discussed the continuing disputes in South Carolina (“South Carolina Retirement System: At It Again [November 21, 2013]”), which are being driven by their retirement system’s high level of management fees.  Rapidly rising fees aren’t just a story in the Palmetto State.  They are a national story.

College Savings (1999)

I’ve looked at the annual reports for six public pension plans (see below) that have released data for FY 2013, and there is a clear picture.  Assets have risen by 7%, while fees have soared by 33%.  The modest rise in assets isn’t just due to market appreciation, although it played a role.  Assets have also risen because employer and employee contributions have outpaced benefit payouts and costs.  The sharp rise in fees is the result of a bit of appreciation and the growing commitment to alternative investment.  For example, the Texas Teachers had a 65% increase in fees because they’ve been active in hiring all sorts of private equity, real estate, and hedge funds. Meanwhile their assets only rose by 6%.  Their fees, at 67 basis points, are still a fraction of those incurred by South Carolina.

I’d like to tell you just how much it’s costing these plans to move into alternatives, but the data isn’t uniformly available because disclosure practices vary from plan to plan.  For example, Pennsylvania State Employees uses one set of definitions for its asset allocation and another set for breaking out fees, so it’s hard to show exactly how much of Pennsylvania’s fees are being absorbed by alternative managers.  In New York, the Comptroller doesn’t break out the fees by asset class, although it is clear that NYC has been enamored of alternative managers.  The Comptroller-elect, Scott Stringer, says he’s going to clamp down on fees.  It is a promise he won’t be able to keep.  Most of City’s fees are imbedded in long-term management contracts.  

Washington State’s annual report provides some idea of just how much in fees private equity commands.  The State has $16 billion in PE assets, or 30% of its portfolio.  The State’s PE fees are $196 million, or 60% of its fees.  I’m sure this pattern is being repeated for the other categories of alternative investment in most states. 

Meanwhile, conventional managers of stocks and bonds are under fee pressure and of course are losing assets as public plans continue their infatuation with alternatives.  I don’t think we should have much sympathy for equity and fixed income managers as they’ve had a long run and failed to add value.  I’m very confident that the alternative managers won’t add value either.  However, it will take many years before it is clear that they failed to produce, and in the meanwhile, alternative managers are going to  enjoy a financial bonanza.

As we enter the holiday season, the beneficiaries of public pension plans are hurting and worried.  Public employees face stagnant wages and declining benefits.  Retirees are wondering whether their pensions will survive.  In the mean time alternative managers are going to enjoy a massive windfall thanks to a 30% increase in public pension management fees.  They’ll face the tough decision of whether to buy another vacation home or put an addition on the existing one.

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