High Investment Fees Don’t Equal High Returns

July 2, 2013 (PLANSPONSOR.com) – A new report examining state pension funds found that there is no connection between high investment fees and high returns on those investments.

“Wall Street Fees, Investment Returns, Maryland and 49 Other State Pension Funds” was released by the Maryland Public Policy Institute. The authors, Jeff Hooke and John J. Walters, initially reviewed the investment, or money management, fees of all 50 states and the states’ five-year annualized investment returns. The information was obtained from each state pension funds’ comprehensive annual financial report (CAFR). The final analysis included only 46 states, since three states—Hawaii, Nebraska and Rhode Island—hadn’t yet published their CAFRs and West Virginia’s CAFR lacked sufficient disclosure.

Hooke and Walters found that while the 46 state pension funds, with total assets of more than $2 trillion, spent more than $9 billion for money management fees during 2012, “for the five years that ended June 30, 2012, we were unable to find a correlation between high fees and high returns.”

They also found that while the majority of state public pension systems contract with Wall Street firms to select publicly traded stock and bonds, “the preponderance of evidence suggests that managers who select publicly traded securities (on behalf of clients) cannot beat benchmark indices.” In terms of investing in alternative investments to consistently beat the public markets, they found that “there is no scientific evidence to support such a notion.” Hooke and Walters recommended that if public pension fund assets were indexed to relevant markets rather than actively managed, “the public pension systems in Maryland and across the United States would save enormous amounts of money on fees, without undue harm to investment performance.”

The authors concluded, “The administrators of state pension systems would be wise to consider indexing the systems’ portfolios to ensure average investment returns and to cut unnecessary fees. This would be a safer and more responsible use of system resources than paying Wall Street management firms billions of dollars each year to deliver sub-par results.”

The full report can be found here.