CalPERS recently underwent a CEM Benchmarking Survey, for comparison against peers in the retirement industry, which found that for fiscal year 2011 to 2012 and fiscal year 2012 to 2013, CalPERS reduced its investment-related costs by about $80 million. (CEM is an independent provider of objective benchmarking information.) The findings show the main factors contributing to this reduction were reducing external management fees and the number of external consultants, as well as the insourcing of various management functions.
In addition, the CEM survey found the actual cost of running the CalPERS investment program is 53.5 basis points less the benchmark cost of 59.2 basis points due to CalPERS’ internal management of public assets, passive management of equities, and its lesser use of fund-of-funds compared with its peers.
Wylie A. Tollette, chief operating investment officer for CalPERS, spoke about the reduction efforts at a recent 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. He pointed out that while internal management drives lower total costs, the tradeoff is that more internal staff is required. Tollette said 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.
Tollette also outlined some steps for reducing costs in the area of fees, specifically external management fees paid on private fund assets (e.g., private equity, real estate, etc.):
- Shift away from fund-of-funds vehicles to direct relationships;
- Scale asset management fees;
- Consolidate portfolio across fewer relationships to gain pricing leverage;
- Negotiate favorable terms on fees with new commitments; and
- Increases focus on co-investment opportunities that have no carry fees.
- Management Reporting: Transitioning from inadequate reporting and data to an automated financial reporting system, as well as the development of timely and meaningful financial reports.
- Cost Awareness: Transitioning from a limited understanding of the total cost to manage the CalPERS portfolio to a comprehensive knowledge of these total costs.
- Fee Reduction: Transitioning from an insufficient focus on management and consulting fees paid to the development of monitoring processes that track and communicate cost-saving efforts.
- Cost Management: Transitioning from a budget process that encouraged the use of external managers and consultants to greater flexibility to manage use of external versus internal resources in the best interest of the fund.
- Benchmarking: Transitioning from difficulties in comparing cost performance against relevant peers to the development of meaningful benchmarking statistics and outperforming relevant peers per unit of value.
“CalPERS has gone to great lengths to understand the role of costs in its portfolio and how best to mitigate their impact,” says Henry Jones, a CalPERS board member and chair of its Investment Committee, based in Sacramento, California. “It’s nice to see positive results from our efforts.”
More information about CalPERS efforts to reduce costs can be found here.