MassPRIM’s laser focus on fees

MassPRIM credits a crucial element of its investment success to a laser focus on controlling costs. Costs, alongside risk and return, comprise three philosophical pillars that shape investment and in the fiscal year 2024 cost saving measures include no-fee co-investments in private equity and direct investments in real estate.

The $96.6 billion Massachusetts Pension Reserves Investment Management Board (MassPRIM) is budgeting for $520.3 million, equivalent to 52.6 basis points, in costs next year. In a recent administration and audit committee meeting, the board heard how the investor’s slightly higher projected fees and expenses are linked to higher average asset levels and a larger allocation to more complex and costly assets that results in higher costs. Next year’s budget has a modest increase of $2.3 million, or 0.4 per cent from the prior year.

MassPRIM credits a crucial element of its investment success to a laser focus on controlling costs. Costs, alongside risk and return, comprise three philosophical pillars that shape investment of the giant PRIT Fund, the pooled retirement fund for Massachusetts teachers and other state employees.

In a balancing act, the increased allocation to higher performing, higher cost, asset classes has to align with a goal to keep expense ratios consistent year over year. The board heard how the investment team are constantly looking for ways to save money and that the fiscal year 2024 budget reflects many of those cost saving measures, such as no-fee co-investments in private equity and direct investments in real estate.

Still, the investment management fees portion of the budget will increase $1.9 million in line with forecast hikes in private equity, real estate and timber fees, increasing in line with projected increases in commitments and acquisitions in those asset classes.

MassPRIM’s budget comprises three pillars – external investment management fees, third-party service providers and internal operations. Of that, investment management fees account for approximately 90 per cent of the total budget, explained Anthony Falzone, deputy executive director and chief operating officer, presenting the draft operating budget. He said the budget doesn’t include performance fees, incentive fees or carried interest as it is extremely difficult to estimate future performance.

The size of any one asset class does not directly relate to the size of the expense, Falzone continued – private alternatives will have higher fee structures than larger allocations in the public markets. “Historically that has been money well spent, specifically in the case of private equity,” he said.

“No one likes to pay high fees but these alternatives are a critical component of MassPRIM’s asset allocation that historically has allowed the PRIT Fund to exceed that 7 per cent actuarial rate of return.”

The board heard that the budget is not necessarily intuitive in that fees often trend in the same direction as asset levels. If asset levels are up fees will normally increase – and growing assets is a good thing.

The fee budget to third-party service providers is decreasing due to lower budgeted PCS platform provider fees and real estate consulting fees, along with cost savings from internal research as the team build out their own data infrastructure. The board heard that the last section of the budget, operations expenses, has increased mainly due to changes in the compensation section to support new hires.

Falzone mentioned the need to continue to look for ways to add transparency and detail to help communicate where MassPRIM is allocating budget. “Additional transparency helps management perform analytics that can aid in measuring where MassPRIM spends,” he said.

Diverse manager costs set to rise In line with mandates

Elsewhere, the board heard how fees paid to diverse managers will increase as the number of diverse managers in the portfolio grows. MassPRIM deployed more than $2.8 billion to diverse managers in 2022, bringing the total to more than $9 billion in line with its award-winning FUTURE Initiative.

MassPrim launched its FUTURE Initiative to comply with 2021 Investment Equity Legislation, championed by Treasurer Goldberg. The Initiative sets goals for MassPRIM to increase the use of diverse investment managers and vendors to at least 20 per cent of total AUM. Alongside allocating capital to diverse managers, the asset manager has promised to reduce barriers to diverse managers, enhance DEI reporting and develop enhanced contract tracking.

MassPRIM  posted a 6 per cent gain for the fiscal year ending June 30, powered by equities. Fixed income continued to struggle, but private market allocations provided ballast in a “stormy environment”, particularly private debt and timberland. MassPRIM is targeting an increase in the private equity target allocation from 12-18 per cent to 13-19 per cent.

In hedge funds, current strategy includes maintaining the allocation to stable value funds and continuing to identify co-investment opportunities. MassPRIM is expanding its presence in multi-PM platforms and their impact on the hedge fund industry, and is also continuing to explore directional funds and sector, country-specialist funds.

The board heard how market downturns create good buying opportunities, and that the team has been busy evaluating opportunities. It has deployed nearly $6 billion in new investments across all asset classes despite markets remaining in a prolonged, volatile period for now.