The California Public Employees’ Retirement System (CalPERS) cut management fee expenses by $161 million over the last five years by bringing assets in-house, despite nearly doubling in assets under management over that time period.
“We are going to need to begin looking at alternative ways to engage in private markets.”At its May investment meeting Monday, the $302 billion pension fund said it spent $750 million on management fees from 2014 to 2015, compared to $911 million from 2009 to 2010.
Total portfolio costs, excluding performance fees, dropped from $1.02 billion to $888 million over the same period.
“The absolute costs of running the portfolio actually dropped while the portfolio almost doubled in size,” said Wylie Tollette, chief operating investment officer.
Cost savings were driven largely by the decision to cut hedge funds and fewer investments in real estate and private equity, according to an analysis by CEM Benchmarking. The pension instead favored passive and internal management.
CalPERS dropped $4 billion worth of hedge fund investments in 2014, citing fees as a primary reason. The following year, the fund announced its intention to reduce its manager count across the portfolio by 50%.
Tollette said CalPERS has so far decreased its number of external managers from 212 to 159, with the goal of getting down to 100.
“We need managers’ help to execute the goals of our program,” Tollette said. “However, we want to make sure those managers are strategically aligned with the objectives and the mission of CalPERS.”
Tollette said the “key strategy” in cutting costs has been the insourcing of public asset classes. CalPERS now manages 68% of assets internally. The average US public fund, meanwhile, manages just 10% of assets in-house.
Private investments remain the most expensive part of CalPERS’ portfolio, accounting for 88% of external management costs, or roughly 80% of total fund costs.
“That is really where we are going to have to continue to look to drive cost savings,” Tollette said. “We are going to need to begin looking at alternative ways to engage in private markets, particularly in private equity.”