The California Public Employees’ Retirement System plans to cut in half the number of Wall Street firms it pays to manage its $303 billion fund, in an effort to cut down on high fees that drag down returns.
The plan, outlined by internal staff in a presentation to CalPERS’ investment committee, would cut the number of external managers and outside consultants from about 212 now to 100 over the next five years.
The plan is the second major effort to cut investment expenses by CalPERS’ chief investment officer, Ted Eliopoulos, who was appointed last September. Eliopoulos quickly made waves on Wall Street by ending the fund’s $4 billion program to invest in hedge funds, slashing about $135 million in fees. CalPERS said its hedge-fund investments were too small to justify their cost and complexity.
The latest effort is far more ambitious and would include private equity and private real estate, which together make up about 20 percent of CalPERS’ portfolio but represent the bulk of outside fees.
CalPERS pays about 0.5 percent to 0.6 percent of the total fund in so-called asset-management fees to external managers, according to CalPERS’ documents. While that sounds like a small amount, it adds up to about $1.5 billion a year and is on top of other costs that CalPERS pays to Wall Street and for its own in-house investment staff.
By comparison, CalPERS this year projects it will have to set aside $8.5 billion of its investment gains to meet benefit payments to state and local retirees. Money diverted from investments — whether to Wall Street fees or to make actual benefit payments — lowers the total amount available for the investment pool, further straining a system that was only 77 percent funded as of June 30, 2014.
Joe DeAnda, a CalPERS spokesman, said the plan doesn’t contain specific targets for cutting down either the total or the percentage of fees the system pays. But, he said, lowering costs is an important objective, as well as spurring better returns. He said that as Wall Street firms find themselves competing for a smaller number of jobs, they should offer more generous terms.