The chairman of an Atlanta advisory panel looking for solutions to a $1.5 billion pension deficit said the city should consider firing its investment managers because returns don't justify their cost.
Atlanta's three pension funds, with assets of $1.9 billion, could potentially save $5 million a year in fees for active money managers, according to data compiled by the panel. Managers for Atlanta's police and general employee funds have underperformed benchmarks, panel Chairman John Mellott said Tuesday during a meeting at city hall.
“We are closet indexers,” said Mr. Mellott, a former publisher of the Atlanta Journal-Constitution and an adviser with Bain & Co.
The city should consider moving to a less-expensive passive investment strategy, or hire a new crop of active managers with lower fees, Mr. Mellott said. As of Sept. 30, the city's 50 investment managers included J.P. Morgan, Invesco, Mesirow Financial and Wellington Management.
“You can't make an argument that having that number of fund managers is appropriate for a $2 billion fund,” Mayor Kasim Reed said in an interview after the meeting. “A part of this reform is going to have to implement weeding out medium performers and focusing on leading performers and narrowing the group in the fashion that a modern complex organization would.”
The city's pension funds combined have returned 3% over the past 10 years, compared with an 8% assumed return, said Mr. Mellott, who noted that some of Atlanta's managers are ouitperforming benchmarks and indexes.
Atlanta's Firefighters, Police Officers and General Employees pension funds each is run by an appointed board made up of current and former employees. Analysis of investment practices and performance is limited, Mr. Mellott said. The large number of investment managers and market positions helps limit returns, he said.
“Investment performance is at best average for all three plans,” according to the panel presentation.
The general employee fund generated a return of 10.27% in the year ended Sept. 30, the most recent period for which the city will provide data. That compared with the fund's benchmark index of 11.46%. In the same period, the police fund returned 10.61%, less than the benchmark 11.54%. The firefighters fund performed better, returning 11.97% compared with a 10.54% benchmark.
Combined fees for the city's investment managers are about 39 basis points, Mr. Mellott told the panel. Management fees for the average index portfolio are about 10 basis points, he said.
The advisory panel in Atlanta also said its pension funds should consider lowering the assumed rate of return on assets to close the funding gap. In calculating the size of contributions needed to pay retirees, the panel based its work on an expected earnings rate of 7.25% over 30 years, down from 8%.
Soonyong Park, managing director and head of global portfolio solutions at consultant Rogerscasey, said it's generally true that over the long term, the majority of active managers don't generate returns to compensate for the fees they charge.
“For many of the clients who don't have time or the ability to really go and research active managers, then passive is the way to go,” he said. “But passive is not the approach all institutions should take, especially if they have the ability and willingness to identify active managers.”