A breakdown of CalSTRS’ investment costs confirms the cost savings of internal asset management, with the fund’s internal asset management costs making up only 0.07 per cent of the total portfolio management costs, but comprising 30 per cent of the total assets managed.
In a presentation to the board at a meeting this week, chief investment officer Christopher Ailman reveals the total cost of managing the $135 billion CalSTRS portfolio is $174 million a year, with only $12.5 million of that spent on internal asset management.
“Internal management of the assets is considerably less expensive than external management. As a basic rule, over the past five years, it costs about one tenth the cost to manage assets internally compared to externally. As the plan continues to grow, staff and the investment committee should look for opportunities where assets can be competitively managed by internal staff rather than external managers.”
According to a breakdown of CalSTRS’ management fees versus a peer group’s median cost, the fund saved about 11.5 basis points on the global equity portfolio by managing it in-house. The highest savings were in US small cap active, where the saving was 41.3 basis points, and US large cap active where the saving was 24 basis points.
Reducing costs is one of the three core objectives of the fund in this fiscal year, and savings have already been made in both internal and external asset management costs.
The investments branch is set to achieve nearly 25 per cent savings, achieved through salary savings and expense reduction – including spending 7 per cent less on salaries, although this is partly due to staff vacancies – while renegotiation of external fees has resulted in an 8.5 per cent reduction in fees paid to external managers.
According to the report every global equity manager except one has been willing to renegotiate and lower their fees.
Despite the cost reductions, Ailman said overall the cost structure of the fund had risen. He said in line with other large funds, the complexity and specialisation of larger funds that have more complex asset allocation has resulted in higher costs.
The team will discuss the long-term financial plan and cost of the portfolio at a July business plan meeting.