CalPERS Cuts Loose Another Quarter of Its Roster

The $302 billion pension fund said it would look at ‘alternative’ ways to invest in private asset classes, which now account for nearly 90% of its fee spend.

The California Public Employees’ Retirement System (CalPERS) cut management fee expenses by $161 million over the last five years by bringing assets in-house, despite nearly doubling in assets under management over that time period.

“We are going to need to begin looking at alternative ways to engage in private markets.”At its May investment meeting Monday, the $302 billion pension fund said it spent $750 million on management fees from 2014 to 2015, compared to $911 million from 2009 to 2010.

Total portfolio costs, excluding performance fees, dropped from $1.02 billion to $888 million over the same period.

“The absolute costs of running the portfolio actually dropped while the portfolio almost doubled in size,” said Wylie Tollette, chief operating investment officer.

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Cost savings were driven largely by the decision to cut hedge funds and fewer investments in real estate and private equity, according to an analysis by CEM Benchmarking. The pension instead favored passive and internal management.

CalPERS dropped $4 billion worth of hedge fund investments in 2014, citing fees as a primary reason. The following year, the fund announced its intention to reduce its manager count across the portfolio by 50%.

Tollette said CalPERS has so far decreased its number of external managers from 212 to 159, with the goal of getting down to 100.

“We need managers’ help to execute the goals of our program,” Tollette said. “However, we want to make sure those managers are strategically aligned with the objectives and the mission of CalPERS.”

Tollette said the “key strategy” in cutting costs has been the insourcing of public asset classes. CalPERS now manages 68% of assets internally. The average US public fund, meanwhile, manages just 10% of assets in-house.

Private investments remain the most expensive part of CalPERS’ portfolio, accounting for 88% of external management costs, or roughly 80% of total fund costs.

“That is really where we are going to have to continue to look to drive cost savings,” Tollette said. “We are going to need to begin looking at alternative ways to engage in private markets, particularly in private equity.”

The US Securities and Exchange Commission (SEC) has filed fraud charges against former State Street executive Ross McLellan, the regulator announced on Friday.

The charges follow a similar indictment from the Attorney for Massachusetts and the Federal Bureau of Investigation (FBI), released publicly in April.

McLellan defrauded a number of State Street transition management clients through “hidden and unauthorized mark-ups,” the SEC claimed.

“State Street employees, under the supervision of McLellan, made misrepresentations concerning pricing in connection with certain transition engagements,” the SEC’s announcement stated. “These misrepresentations were made in a variety of communications to customers, including false trading statements, pre-trade estimates, and post-trade reporting.”

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Along with two “co-schemers,” McLellan allegedly helped produce “false and misleading statements” for a customer—the UK’s Royal Mail Pension Plan—when confronted about the charges.

McLellan then instructed colleagues to “misleadingly characterize the hidden mark-ups as a ‘fat finger error’ and as ‘inadvertent commissions’,” the SEC said.

The overcharging practice generated roughly $20 million in additional revenue for State Street, the regulator estimated. This included $3 million from the Royal Mail pension, $9.7 million from a Middle East sovereign wealth fund (believed to be the Kuwait Investment Authority), $3.7 million from an Irish government agency (believed to be the country’s National Pension Reserve Fund), and $3 million from a number of other significant transition management clients in the UK and the Netherlands.

Following the prior charges, McLellan’s lawyer claimed his client had “committed no criminal acts and had no criminal intent,” and indicated that he will fully defend himself.

“Every major bank charges its clients markups on its bond transactions in order to generate profits,” the attorney added.

The US Attorney for Massachusetts and the FBI also charged Edward Pennings, another ex-State Street executive, last month. Pennings has not been charged by the SEC.

Following Royal Mail’s inquiry into trading costs, McLellan and Pennings left State Street effective October 5, 2011.

Read the SEC complaint in full.

Related: Reluctant Voices [CIO’s 2012 investigation of transition management] & Fraud Charges, Arrest for Ex-State Street Transition Managers

Note: An earlier version of this article linked $3M of allegedly excess revenue to US, UK, and Dutch clients. That figure does not in fact involve US investors.