Study: Public Pension Funds Shedding Underperforming Managers

January 14, 2003 ( - This is not an opportune time to be a Wall Street money manager with a US state pension fund as a client.

Smarting from bad stock market losses, state pension fund managers are not afraid to show a lagging manager the door and funds in great numbers are doing just that, Reuters reported. State employee retirement funds lost more than $150 billion in the fiscal year ending June 30, 2002, according to Federal Reserve data.

Given the poor returns, “there is less tolerance for underperformance,” Kevin Leonard, an investment consultant with Seagal Advisors in Boston, told Reuters. Leonard, who advises public pensions on the hiring and firing of outside managers, said he has never seen so many changes in portfolio managers in his 10-year career. “When the market is down 29% and you are down 30% there is a lot less understanding,” he told Reuters.

CalPERS Sacks Three Managers

A chief example of this trend is California’s behemoth $133-billion CalPERS state employee pension fund – which fired Goldman Sachs, Merrill Lynch and Credit Suisse in 2002.

Also, frustrated by heavy market losses, Maryland released six portfolio managers, the Illinois’ teachers fund let go of four and Massachusetts showed one outside investment adviser the door.

Gail Stone, executive director of the $3.4 billion Arkansas Public Employees Retirement System, put several managers on watch last year.

Stone, whose fund’s assets dropped 15.8% in the last fiscal year — the worst showing of states in a Reuters survey – told Reuters that the message to them all was: “I’m watching you and if you don’t straighten up, I’m going to fire you.”

The survey of the biggest public employee pension funds in 39 states found an aggregate loss of about $90 billion this year over last year. Every fund on the list dropped in total assets, Reuters said. The 11 remaining states either did not return calls for comment or do not have public pensions.

The stakes are high because investment companies, which pull in fees equal to 0.5% of assets under their management annually, oversee as much as several billion dollars in a public employee retirement fund, Reuters said. Underperformers who have escaped the ax have been told to shape up.

The Reuters Survey  

Of the 39 states in the Reuters pension performance list, the best in terms of losses as of June 30, 2002 over June 30, 2001 were:

  • South Carolina (-0.5%)
  • Nevada (-1.1%)
  • West Virginia (-1.2%)
  • Minnesota (-1.9%)
  • New Mexico (-2.2%).

The worst five were:

  • Colorado (-11.4%)
  • Arizona (-12%)
  • New Jersey (-12.3%)
  • Michigan (-13.8%)
  • Arkansas (-15.8%).