U.S. public pension fund officials are increasingly asking their external investment managers for fee concessions as part of an effort to cut operating costs.
Some of the concessions are taking place behind the scenes, as in the case of the $74.4 billion Washington State Investment Board. Others are coming as the result of public audits, such as that of the $68.7.billion North Carolina Retirement Systems, that found some manager fees were higher than the norm.
The most visible fee reduction efforts are those of the nation's two largest public pension systems, the $204.4 billion California Public Employees' Retirement System and the $129.7 billion California State Teacher's Retirement System.
CalPERS officials said they have saved $99 million in fees in the past six months across asset classes as the result of fee reductions. The largest cuts, totaling $56 million, were made by 10 hedge fund managers, said CalPERS Chief Investment Officer Joseph Dear.
“We have reduced the number of our hedge fund relationships but have obtained better fees on commitments,” said Mr. Dear in an e-mail response to questions.
The remaining cuts came from 11 global equity managers, 17 private equity managers, two fixed-income managers and 13 real estate managers, said CalPERS spokesman Clark McKinley.
Mr. McKinley said that in the next few months, Sacramento-based CalPERS will be looking for additional fee cuts from other real estate and private equity managers.
At West Sacramento-based CalSTRS, officials said they have been reaching a high level of success as they push for an average 15% across-the-board cut for all external investment managers. CalSTRS spends $140 million annually on money management fees, its biggest administrative expense.
Part of the reason for the success might be that CalSTRS officials aren't taking no for an answer.
“Our approach is that we will achieve lower fees one way or another,” said Trish Taniguchi, director of global equities.
“One manager said, "We don't negotiate fees,' so we reduced our investment with them by 30(%) to 40%,” she said.
Ms. Taniguchi would not identify the manager. But she said the manager, whose fee is tied to the amount managed for CalSTRS, is now receiving a fee that is lower than it would have received had it agreed to the initial reduction request.
Other investment managers have appeared to see the light.
Ms. Taniguchi said CalSTRS officials have reached some degree of agreement on fee reductions with 18 of 30 global equity managers since the fee-cut program began a year ago. Negotiations continue with the remaining 12 managers, she said.
CalSTRS has solicited input from the managers as to how the fee reductions should take place, she said. Some managers have proposed, and CalSTRS has agreed to, a performance incentive system that pays minimum fees in years of poor performance and increased compensation in years in which portfolios outperform their benchmark.
CIO Christopher Ailman told the CalSTRS board at its monthly meeting on July 9 that significant fee reductions were being achieved across asset classes. As of last week, a detailed summary of the cuts was not yet available.
But reductions achieved in global equity manager fees will be significant because it is CalSTRS' largest asset class. Global equities comprise $67.5 billion, or more than 50%, of the system's total assets, according to financial statements.
While CalSTRS and CalPERS officials have discussed cost reductions openly at public board meetings, officials at other funds have not.
“We have had some concessions, some fee reductions,” said Theresa Whitmarsh, executive director of the Washington State Investment Board, Olympia.
But Ms. Whitmarsh would not go into detail, saying the investment board has a policy of not publicly discussing the issue.
Indeed, approaching investment managers to renegotiate an existing contract is a delicate matter, especially as plan executives try to keep winning managers in their stable.