From Pension Pulse:
Dan Davies, a senior research adviser at Frontline Analysts, wrote a comment for The New Yorker, Is Wall Street Really Robbing New York City’s Pension Funds?:
Most any fee, even a fraction of one per cent, will come to look big if
it’s multiplied by tens of billions of dollars. So when New York City
Comptroller Scott Stringer wanted to make a point recently about the
fees the city’s public-sector pension system had paid to asset managers
between 2004 and 2014, he didn’t have to work very hard to find an
outrageous number. Over the past ten years, New York City public
employees have paid out two billion dollars in fees to managers of their
“public market investments”—that is, their securities, mainly stocks
and bonds. Gawker captured the implication as well as any media outlet
with its headline: “Oh My God Wall Street Is Robbing Us Blind And We Are Letting Them
Stringer’s office was barely more restrained, sending out a press
release that called the fees “shocking.” The comptroller also issued an
analysis that spelled out the impact of fees on the investment returns
of the five pension funds at issue: those of New York’s police and fire
departments, city employees, teachers, and the Board of Education.
Though the comptroller didn’t specify which firms had managed the funds,
they were likely a familiar collection of financial-industry villains.
“Heads or tails, Wall Street wins,” Stringer said.
The rhetoric tended to brush past the fact that the pension funds
didn’t actually lose money. In the analysis, their performance was being
measured relative to their benchmarks, essentially asking, for every
different class of asset, whether the funds performed better or worse
than a corresponding index fund would have. For reasons unclear, the
city’s pension funds have been recording their performance without
subtracting the fees paid to managers, but the math shows that New York
City’s fund managers outperformed their benchmarks by $2.063 billion
across the ten-year period under review, and charged $2.023 billion in
management fees.
Compared with the average public pension fund’s experience on Wall
Street, this is actually, frighteningly, pretty decent. All too often,
when researchers investigate pension-fund performance, they find that
management fees have eaten up more than any outperformance the managers
have generated. A study published in 2013 by the Maryland Public Policy Institute
concluded that the forty-six state funds it had surveyed could save a
collective six billion dollars in fees each year by simply indexing
their portfolios.
I covered the institutional-fund-management industry as an analyst for
ten years, and was never given specific information on the pricing of
individual deals, but I would estimate, based on the growth of the funds
from 2004 to 2014, the variance in the market (especially the crash of
2008), and the total fees, that New York City paid, on average, about
0.2 per cent, or what a fund manager would call “twenty basis points.”
You would expect the trustees of such a large portfolio to strike deals
on fees, and indeed twenty basis points is much lower than the average
paid to managers of most actively managed mutual funds (between
seventy-four and eighty basis points, according to the Investment
Companies Institute). It is still far more, though, than the five basis
points charged by the Vanguard index tracker fund to large institutional
investors....MUCH MORE
The New Yorker story was also highlighted by Alphaville's
Further Reading linkmania post.
