Asset AllocationApril 15, 2014

CalPERS Cut $80M in Investment Expenses in Two Years

The largest US public pension plan spent $136 million less than the benchmark costs following its cost effectiveness initiative.

Reported by Featured Author

(April 15, 2014) — The California Public Employees’ Retirement System (CalPERS) reported a drop of nearly $80 million in its investment operation costs over the last two fiscal years.

According to the investment office’s reports, CalPERS spent almost $1.3 billion to manage its portfolio for the fiscal year 2012 to 2013 and was able to cut down on cuts by reducing external management fees, minimizing the number of external consultants, and bringing management functions in-house.

“CalPERS has gone to great lengths to understand the role of costs in its portfolio and how best to mitigate their impact,” said Henry Jones, CalPERS board member and investment committee chair. “It’s nice to see positive results from our efforts.”

The $285 billion fund was also lauded by CEM, a provider of benchmarking information, for being “cost-advantaged” when measured against its peers. CEM found CalPERS’ expenses were $136 million—or 5.8 basis points (bps)—less than the benchmark cost.

“CalPERS actual cost of 53.5 bps is less than the benchmark cost of 59.2 bps due to internal management of public assets, passive management of equities, and lesser use of fund-of-funds than its peers,” the report said.

However, the Sacramento-based pension plan’s cost advantage has not resulted in higher value add, according to CEM’s data.

The fund recorded weak performance of 1.2% in total fund return over the last five years and the net value added was -3%. As a remedy, the investment office recommended program changes that deliver more value for cost, such as restructuring portfolios and investing in risk management and control capabilities.

“The CalPERS investment office strives to always be acutely aware of costs, cost-drivers, and effective cost-management strategies,” said Ted Eliopoulos, CalPERS’ interim CIO. “The recognition from CEM and our own internal findings tell us that we’re on the right path, but cost-effectiveness is something that we must continue to diligently monitor in all areas of our operations.”

The new initiative will rely heavily on transition from external to internal management and scaling back on fees paid on private asset fund investments, CalPERS said.

“Cost effectiveness accomplishments [could] afford CalPERS the ability to reinvest a portion of the cost savings to self-fund the target staffing and the increased portfolio management service infrastructure,” the report said.