MassPRIM taking closer look at cost structure

New intitiative guides fund on fee savings, return enhancements

102813 trotsky
Michael Trotsky believes 'everyone is looking for better ways.'

The Massachusetts Pension Reserves Investment Management Board launched the first phase of a cost-saving and return-enhancing program that follows in the footsteps of public funds from other states that, in turn, are following in the footsteps of several Canadian plans.

Phase 1 initiatives of Project SAVE include renegotiating some public equity and hedge fund manager contracts to reduce fees for the $53.9 billion Boston-based fund; investing in hedge funds rather than hedge funds of funds and exploring more passive hedge fund strategies; looking at more private equity co-investing; establishing a cash overlay; and restructuring how the fund handles claims-filing procedures and recovery from class-action litigation proceeds.

“I noticed we spend a significant amount of time talking about returns, and although that's very important, we never took an in-depth look at our cost structure,” Michael Trotsky, MassPRIM's executive director and chief investment officer, said in a telephone interview. “Not all initiatives are just around cost savings; we're looking broadly at how we're running our business.”

Project SAVE, which stands for strategic analysis for value enhancement, was created by Mr. Trotsky earlier this year to find ways to reduce costs and potentially increase returns for MassPRIM. Some of these initiatives have been implemented; others are scheduled to go into effect in early 2014. MassPRIM expects these Phase 1 initiatives to either save the fund or provide return enhancements of $101.2 million per year.

Inspiration from SWIB

MassPRIM was inspired in part by a few other pension plans that have initiated similar programs. The $86.4 billion State of Wisconsin Investment Board, Madison, has been a big influence on the Massachusetts fund. For example, SWIB saves on fees by managing a substantial amount internally, whereas MassPRIM does no in-house management.

Wisconsin manages 56% of assets internally and is looking to increase that figure. Spokeswoman Vicki Hearing said SWIB manages 86% of U.S. equities, 52% of international equities and 50% of fixed income internally. It also manages nearly all of its Treasury inflation-protected securities investments in-house.

SWIB is also seeking to reduce expenses by direct investing or co-investing in private equity.

“SWIB seems to be a step or two ahead of everyone in this regard,” said Timothy Vaill, a member of MassPRIM's investment committee and the former chairman and CEO of Boston Private Financial Holdings Inc., who retired from the Boston-based bank holding company in 2010. “We visited them and had a good discussion with them.”

According to research from CEM Benchmarking, a Toronto-based benchmarking services firm that MassPRIM hired to study the fund's performance, many of MassPRIM's peers manage on average 24% of all assets internally.

SWIB wasn't the only asset owner that MassPRIM studied.

The $272.7 billion California Public Employees' Retirement System, Sacramento, manages 83% of its public equity portfolio internally and is looking to increase that percentage. The $47 billion Alaska Permanent Fund, Juneau, does co-investing and some direct investing in infrastructure and private equity, and plans to manage a portion of these public and private assets internally.

Mr. Vaill added that MassPRIM is also “watching the state of Oregon very closely,” as the Tigard-based Oregon Investment Council is proposing legislation that would grant it greater autonomy over running the $63 billion Oregon Public Employees Retirement Fund. MassPRIM also is looking at the $115.9 billion Teacher Retirement System of Texas, Austin, which is reducing expenses by co-investing with New York-based private equity firm KKR & Co. LP.

MassPRIM and other state funds actually are following in the footsteps of Canadian pension plans. Plans like the Toronto-based C$129.5 billion ($124 billion) Ontario Teachers' Pension Plan, Montreal-based C$185.9 billion Caisse de Depot et Placement du Quebec and Toronto-based C$60.8 billion Ontario Municipal Employees Retirement System have been able to make bold investments by managing assets internally through autonomous in-house teams and management subsidiaries such as the Quebec fund's Ivanhoe Cambridge and OMERS Capital Markets.

“We're looking at the Canadian funds as an example,” said Oregon Investment Council spokesman James Sinks regarding the proposed state legislation granting the Oregon fund greater operating independence.

Mr. Vaill also said MassPRIM executives spoke with some Canadian pension funds.

Maximizing legal claims

Where MassPRIM is branching out from its peers is through its litigation initiative. Through this aspect of Project SAVE, the fund developed a methodology with the help of its legal counsel to maximize claim recoveries and ensure that MassPRIM captures every available dollar in class action lawsuits.

Although MassPRIM officials are researching the advantages of making direct real estate investments and running some equity and fixed-income assets in-house, Mr. Trotsky noted that the rollout for these Phase 2 initiatives for Project SAVE “won't be for a while.”

This article originally appeared in the October 28, 2013 print issue as, "MassPRIM taking closer look at cost structure".