“The OCERS fee policy provides clear guidance to the investment community regarding our trustees’ preferences to manage fees downward and better align the interests of our money managers with those of our fund and our stakeholders,” said Charles Packard, chair of the OCERS investment committee, which approved the new policy last week.
The 10-section policy explains that fees alone do not drive the manager-selection process, but conforming fees will be given selection preference when competing managers’ capabilities and expected return/risk profiles are comparable. The policy expresses a general preference for performance-based fees if they can be properly structured to better align interests at the same expected cost as fixed fees. The policy also allows the OCERS staff to negotiate for fixed fees when a money manager offers a highly competitive fixed fee that would be less than the expected cost of a performance fee over a market cycle. The policy also enumerates a number of red flags for performance fees and carried interest, and expresses clear preferences on fee structures.
“The new OCERS fee policy is one of the most comprehensive we have seen, and articulates well-crafted principles that could readily be used by other public funds,” said Allan Martin, partner at NEPC, the national pension consulting firm, which is OCERS’ general investment consultant.
A unique feature of the new policy is the trustees’ endorsement of the concept of collaborative or coordinated fee negotiations by public pension funds, and separate “P-share classes” for pension funds that collectively invest substantial amounts in hedge funds, private equity managers, commingled funds and similar fund structures.
“OCERS is taking the lead in advancing the concept of a public pension portfolio procurement platform, which we have dubbed ‘P5’ in a white paper shared with my CIO colleagues in California. That initiative will eventually be taken nationwide if we find sufficient interest among plans in the $5 to $50 billion assets range,” said Girard Miller CFA, the OCERS Chief Investment Officer.
According to Tom Flanigan, chair of the Board of Retirement and vice chair of the investment committee, the new policy sends a clear message to hedge funds and money managers that have been collecting high fees premised on their performance a decade or two ago. “In today’s world of lower returns and reduced expectations, it’s now time for the money managers to sharpen their pencils,” noted Flanigan.
OCERS is a $10.5 billion cost-sharing multiple-employer defined benefit pension plan covering employees of Orange County and 14 other participating employers. The new policy is posted on their website.