Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

ONLY ROBOTS CAN TALLY WHAT THE LARGEST U.S. PENSION FUND PAYS IN FEES

Posted by hkarner - 24. Mai 2017

Date: 23-05-2017
Source: The Wall Street Journal

The nation’s largest pension plan has 380 people overseeing roughly $320 billion in assets. But when one of its top officials was asked during a board meeting how much in performance fees was paid to private-equity managers, he had to acknowledge no one knew.

“We can’t track it today,” said Wylie Tollette, the chief operating investment officer of the California Public Employees’ Retirement System, at the 2015 meeting. The disclosure surprised board member JJ Jelincic, who said: “If you can’t track them they are kind of hard to manage.”

“WE CAN’T TRACK IT…”

Only algorithms could find the answer. A software program developed by outside firms determined at the end of 2015 that Calpers had paid $3.4 billion in performance fees over the past quarter-century to the private-equity firms that managed its money. In 2016, that number was $490 million.As the nation’s largest public pension funds plunge deeper into complicated investments as a way of chasing returns, they are becoming more reliant on machines to make sense of it all. Some executives worry that a greater reliance on databases, coding and other quantitative tools creates the false impression that they have a better handle on their investments than they actually do.

“If you’re using software to deal with the complexity in your portfolio maybe you should simplify your portfolio first,” said Marc Levine, chair of the Illinois State Board of Investment, which oversees $20 billion for state employees, judges and lawmakers.

The complexity is the result of a push by public pensions to boost investment profits as a way of filling funding gaps that make it more difficult to fulfill future obligations to retirees. Of the 73 largest state-sponsored plans, 44 had more than 20% of their assets in alternative investments such as private equity, hedge funds, real estate and commodities as of 2014, according to a recent report from The Pew Charitable Trusts.

These alternative investments can be more difficult to value when compared with stocks and bonds, and typically mean higher fees for investors. The added complexity also makes it more difficult to be transparent about what is being paid, according to Pew, which estimates that $4 billion in fees paid by the 73 plans had not been reported publicly.

Some public pensions say computer models can help manage their complex portfolios and predict how their assets will behave in different economic environments. Grouping investments by risk rather than type, they said, exposes dangers that might otherwise remain hidden.

“You can look at your portfolio and say ‘Oh wow, I’ve got a lot more inflation risk than I should have or a lot more credit risk than I should have,” said Robert T. Bass, a BlackRock Inc. managing director, who provides software that conducts this analysis for pension funds. “Maybe I should take that down a little.’”

In Fairfax County, Va., new software programs allow public pension fund managers to plug their assets into a computer and ask what they should buy if, say, they want better protection against inflation.

“You can put in what you want to solve for at the outset,” said Andy Spellar, senior investment officer for the county’s $3.7 billion employee retirement system.

In California, Calpers turned to computer models to understand its private-equity costs. Calpers has roughly $26 billion invested with private-equity firms, which buy companies with the goal of earning more in a later sale or public offering. They typically charge pension-fund clients a management fee of 1% to 2% of assets and a performance fee of as much as 20% of the gains when they sell companies for a profit.

Calpers was long unable to separate one set of fees from the other, relying in part on a set of spreadsheets to keep track of the data. The information was also stored in a range of different formats, making it difficult to aggregate and analyze.

It took five years to develop a new data-collection system that relies on private-equity managers to fill out new templates describing their various fees. A data and accounting firm then compiles the information and feeds it into the software program.

The new quantification is changing the way Calpers operates, one official said. It is “motivating us to explore alternative ways of investing in private equity that might have less of a fee burden,” Mr. Tollette said in an interview.

But the system hasn’t solved every problem; not all private-equity managers give Calpers the data it needs.

Some critics also say the way Calpers presents the new data can be confusing. Earlier this month, for example, Calpers showed its board a chart illustrating that management fees and expenses paid for investments had fallen to $638 million in fiscal 2016 as compared with $1.04 billion in fiscal 2011.

But that $402 million difference excluded $121 million in management fees and “partnership expenses” such as legal and auditing costs, referencing these additional charges in a footnote. Calpers in a press release last week touted the drop without mentioning the extra charges.

A spokesman said Calpers will correct the press release.

“The transparency has not increased,” said Mr. Jelincic last week, the board member who first asked about the private equity data in 2015. “In fact, to some extent, it has decreased.”

 

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