The fourth biggest pension system in the US will change its relationship with investment managers after learning fees had wiped out much of the gains made over the last 10 years.
“Right now, heads or tails, Wall Street wins.”City Comptroller Scott Stringer released an analysis of historical performance data for the $160 billion system, revealing its managers had underperformed the benchmark by a net $2.5 billion over 10 years. CIO Scott Evans and the Bureau of Asset Management conducted the study.
“Right now, heads or tails, Wall Street wins,” Stringer said. “In conjunction with our trustees, we are going to re-examine our entire fee structure so that our interests are better aligned and managers who do not create value will not continue to invest our funds.”
Private equity, hedge fund, and real estate managers together lost the pension system $2.6 billion over a decade, relative to a passive low-fee alternative.
Over the same period, managers of public asset classes exceeded the benchmark slightly, Stringer said. However, those managers “gobbled up” more than 95% of the value added—over $2 billion—leaving almost no extra return for the funds.
The poor performance of private asset classes, combined with the marginally better performance in public markets, cost the city pension funds nearly $2.5 billion in lost value over the past 10 years, the analysis showed.
Last month, data from consulting firm Casey Quirk showed that over 2014, the average US-based asset manager saw profits rise by double-digit percentage points.
“When you do the math on what we pay Wall Street to actively manage our funds, it’s shocking to realize that fees have not only wiped out any benefit to the funds, but have in fact cost taxpayers billions of dollars in lost returns,” said Stringer. “It’s clear that the status quo needs to change.”
As a result of this analysis, Stringer said the city would overhaul how it engages its external managers to better align fees paid to the value created for fund beneficiaries.
The comptroller said that he would work with other fund trustees to “maximize value from Wall Street.” This would include enhancing disclosure of information around fee structures and providing uniform accounting of net and gross fees across asset classes.
“Moving forward, the city’s pension funds will be more transparent about our fees, while demanding fairness and accountability in how our investment partnerships are structured,” he concluded.