CalPERS will set an external fee reduction target for the financial year, in light of the fact it spent more than $1 billion on external asset management fees in 2009-2010 and only a relatively modest $29.5 million on investment office personnel services including salaries.
About 62 per cent of CalPERS’ assets are managed inhouse, compared to about 33 per cent for its global peers according to a database put together by CEM. It also manages more assets passively than its global peers (31 versus 22 per cent), which when combined with the internal management, brings the costs down for the fund.
External asset management fees at CalPERS accounted for 90 per cent of the $1.2 billion in total investment office costs in 2009-2010. The other costs were personnel (3 per cent), portfolio management tools (2 per cent), consultants (2 per cent), legal and audit fees (1 per cent), appraisal fees (1 per cent), enterprise overhead (1 per cent)
Of the external management fees CalPERS dished out in 2009-10, the alternative investment management program accounted for 49 per cent of those costs, followed by global equity (31 per cent), real estate (17 per cent), inflation linked (2 per cent) and fixed income (1 per cent).
The Carlyle Group was the biggest beneficiary of the external fees paid to managers, receiving $52.45 million in fees in 2009-10.
In addition to developing an external fee reduction target, the fund will also enhance its financial reporting automation and data integrity, and determine an appropriate benchmark to set expense ratio targets for the fund.
Cost effectiveness initiatives for 2011-12 include continuing the external fee reduction initiatives and identifying a relevant peer group and process to benchmark the total expenditures, and work with CEM to refine the benchmark data collection and make it actionable.
CalPERS claims to be about 8 basis points more cost-effective than a CEM Custom Peer Group of 10 sponsors, with a median size of $64.5 billion, with that benchmark cost calculated as an estimate of peers costs if they had the same asset mix.
The fund claims that its cost-advantage is driven by its “public markets implementation style”, or in other words the combination of more inhouse and passively managed assets.
Cost-effectiveness is one of six strategic priorities for CalPERS’ 2011-12 investment office roadmap, the others are investment performance, capital allocation, risk management, organisation systems and controls, and talent management.
The fund’s ‘cost effectiveness vision’ includes more sophisticated financial management and governance structure that ensures pervasive cost awareness at asset class and organisation level; better tracking and reporting systems and improved data management; co-ordinated budget and resource allocation across INVO; greater flexibility to manage resources in the best interest of the fund and improved decision-making regarding use of internal versus external resources; and outperformance of relevant peers per unit of value.
CalPERS’ external asset management expenses: top 5 by asset class (2009-10)
| AIM | Carlyle Group | $52,450,000 |
| TPG | $35,499,000 | |
| Apollo | $30,315,000 | |
| PCG | $19,132,000 | |
| Avenue Capital | $18,586,000 | |
| Global equity | Taiyo (corp gov) | $18,023,000 |
| Relational Investors (corp gov) | $10,873,000 | |
| Arrowstreet Capital (external equity) | $7,169,000 | |
| Genesis Asset Managers (ext equity) | $5,891,000 | |
| JP Morgan (external equity) | $5,741,000 | |
| Global fixed income | Pacific Investment Mgt | $1,861,000 |
| Mondrian | $1,644,000 | |
| Nomura Corp Research | $1,609,000 | |
| AllianceBernstein | $680,000 | |
| Rogge Global Partners | $643,000 | |
| RMARS | UBS | $28,746,000 |
| Chatham Asset High Yield Offshore | $23,488,000 | |
| OZ Domestic Partners II | $19,363,000 | |
| Black River FI Relative Value | $19,204,000 | |
| PFM Diversified Fund | $19,168,000 | |
| ILAC | Timberland Timber Co | $9,152,000 |
| Alinda Capital Partners | $8,274,000 | |
| CIM Infrastructure | $3,000,000 | |
| UBS | $2,500,000 | |
| Carlyle Infrastructure Partner | $1,500,000 | |
| Real estate | LaSalle Investment Management | $16,976,000 |
| CIM Group, LLC | $15,273,000 | |
| IHP Capital Partners | $12,166,000 | |
| Hines Interest | $10,687,000 | |
| Stockbridge Capital Group | $9,577,000 | |
| Remaining external | management expenses total | $646,612,000 |
| Grand total | $1,055,802,000 |
