The biggest pension fund in America could cut up to 50% of its managers in a bid to further reduce costs, according to the Wall Street Journal.
The California Public Employees’ Retirement System (CalPERS) is expected to make a formal announcement of its intentions today ahead of discussing the issue at an investment committee meeting on June 15.
CIO Ted Eliopoulos said the proposal aims “to gain the best deal on costs and fees that we can”, the Journal reported.
The $300 billion pension has already taken significant steps to reduce spending on external managers since Eliopoulos’ appointment last year. CalPERS is in the process of winding up its Absolute Return Strategies program of hedge fund investments, and in January Eliopoulos announced plans to reduce by two-thirds the number of private equity managers the pension uses.
“Asset managers are willing to provide fee discounts provided they get bigger mandates.” —Mathias Neidert, bfinanceThe planned shift will take place over five years, cutting external manager relationships used by CalPERS from its current 212 to roughly 100. However, Eliopoulos said this move would not alter the balance between internally and externally-managed assets—instead, third-party managers will receive bigger mandates, ranging between $350 million to upwards of $1 billion.
CalPERS’ most recent deal—an Asian infrastructure mandate with Australian firm QIC—fell comfortably into this bracket at A$1 billion ($764 million).
Mathias Neidert, director and head of public markets research at consultancy bfinance, said many asset owners were already looking at taking a similar path.
“It’s a stated objective of CalPERS to reduce the costs of its investment program,” he said. “Asset managers are willing to provide fee discounts provided they get bigger mandates.”
As well as the cost element, Neidert said fewer manager relationships may help CalPERS monitor performance more closely. As a portfolio grows, he said, asset owners can find it harder to effectively monitor a large number of funds for performance lag and style drift.
CalPERS’ decision in September to exit hedge funds was in part to reduce the costs associated with the program, but Eliopoulos also cited difficulties in scaling up the allocation. CalPERS’ investment expenses exceeded $1 billion for the past three financial years, including performance fees and back office costs, according to its annual reports.
In April, two of New Jersey’s public pensions announced plans to review investment management fees following pressure from trustee boards for a “forensic audit” on third-party payments. Last week, the state’s investment council was asked to defend its alternative investment allocations, after a large proportion of the $600 million it paid to external managers went to alternatives managers’ performance fees.
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