The California Public Employees’ Retirement System (CalPERS) reported that annual ongoing costs for its investment operations have declined by approximately $90 million for the five-year period from 2009 to 2014.
In the system’s review, the cost to manage the portfolio for fiscal year 2013-14 was found to be approximately $1.7 billion, with external management fees contributing 92% of that figure. When excluding profit-sharing fees to external managers—fees that can be volatile—the annual ongoing cost to manage the portfolio decreased by $17 million during the last fiscal year, and by $90 million since 2010.
Contributors to the savings include a continued focus on restructuring portfolios, reducing external management fees and the number of external consultants, as well as additional insourcing of investment management functions. Last year, Wylie A. Tollette, chief operating investment officer for CalPERS, spoke about the cost reduction efforts at a CalPERS Investment Committee meeting. He said CalPERS internally manages 86% ($189 billion) of its public market assets, which are 67% of the total plan assets, and that the CalPERS Investment Office is working to reduce reliance on external consultants and advisers, using them only when capabilities such as scale or technology or expertise cannot be replicated internally at a reasonable cost.
CEM, an independent provider of objective and actionable benchmarking information, found that the annual cost to manage the CalPERS portfolio was $206 million lower than its peers. CEM cited internal management of public assets, index-oriented management of equities, and lesser use of fund-of-funds as contributors to the cost-savings.
“How we manage costs has a direct impact on the performance of the fund,” says Ted Eliopoulos, CalPERS chief investment officer. “The recognition from CEM and our own internal findings tell us that we’re on the right path, but costs are a factor that you can’t lose sight of; you have to stay vigilant.”
CalPERS has spent considerable time and effort on reducing costs in all areas of the investment program during the last several years. The focus includes financial reporting, cost awareness and management, fee reductions and benchmarking. Cost effectiveness is also embedded in the System’s Investment Belief publication, “Costs matter and need to be effectively managed.” The goal of all cost initiatives is to improve net returns on assets.
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