CalPERS seeks sav­ings on fees

Los Angeles Times - - BUSINESS BEAT - By Dean Stark­man dean.stark­man@la­

NEW YORK — 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, 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 re­duce the num­ber of ex­ter­nal man­agers and out­side con­sul­tants from 212 now to 100 over the next five years.

The plan is the sec­ond ma­jor ef­fort by CalPERS’ chief in­vest­ment of­fi­cer, Ted Eliopou­los, to cut in­vest­ment ex­penses.

Eliopou­los, who was ap­pointed in Septem­ber, 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% of CalPERS’ port­fo­lio but rep­re­sent the bulk of out­side fees.

CalPERS pays about 0.5% to 0.6% of the to­tal fund in so-called as­set man­age­ment fees to ex­ter­nal man­agers, ac­cord­ing to CalPERS’ doc­u­ments. Although 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 to 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 for Wall Street fees or for ben­e­fit pay­ments — low­ers the to­tal amount avail­able for the in­vest­ment pool, fur­ther strain­ing a sys­tem that was only 77% funded as of June 30, 2014. Joe DeAnda, a CalPERS spokesman, said the plan doesn’t con­tain spe­cific tar­gets for cut­ting ei­ther the to­tal or the per­cent­age of fees the sys­tem pays.

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