investment fees | Pension360

Group Calls For Transparency In Canadian Pensions As Investment Expenses Rise

The Canada Pension Plan Investment Board (CPPIB) has been an active investor in private equity, real estate and infrastructure around the world. Pension360 has covered Board’s endeavors into infrastructure and real estate in India and warehouses in California.

But those kinds of investments carry fees and expenses, and one Canadian think tank is calling on the CPPIB to make those expenses clearer. From CBC News:

The report, by former Statistics Canada chief economic analyst Philip Cross and Fraser Institute fellow Joel Emes, says the Canada Pension Plan Investment Board should more clearly explain the added costs of its new approach to investing.

Beginning in 2006, the CPPIB broadened its holdings beyond traditional stocks and bonds to invest in areas such as international real estate and infrastructure projects.

That new approach resulted in an additional $782 million for external management fees and $177 million on transaction fees, the authors say.

The CPPIB, which manages the funds not needed in the near term to pay Canada Pension Plan benefits, has moved away from traditional holdings because of low interest rates that keep bond returns low, according to CEO Mark Wiseman. In the past year, it has also invested selectively in stocks because of their high valuations.

Wiseman says the “active investment” approach is needed to create value “over an exceedingly long investment horizon” and to diversify the CPPIB portfolio.

The CPPIB has invested in infrastructure projects in countries such as Brazil and India and real estate portfolios in the U.S. and Australia.

The strategy led to returns of around 16 percent in 2013. But investment expenses have spiked as a result of the active management. From CBC:

The Fraser Institute argues the CPP has faced a big hike in the cost of its investments as a result of its new strategy — from $600 million or 0.54% of assets in 2006 to $2 billion or 1.15 per cent of its assets in 2013.

That figure includes the cost of collecting the CPP from Canadian paycheques and sending benefits to pensioners.

It is being less than transparent in failing to report its external management fees and transaction costs as part of CPPIB accounts, the report says. Instead those costs appear in federal government public accounts and overall accounts for CPP.

“The CPPIB needs to be more transparent about the expense of designing and implementing its investment strategy; every dollar spent on behalf of the CPP is one less dollar available to beneficiaries,” the Fraser Institute says.

External management fees might include investment banking fees, consulting fees, legal and tax advice and taxes on transfer of real estate, which would apply to the new style of investing, but might not be as high in stock and bond investing.

The Fraser Institute, the think tank that produced the report, advocates for smaller government and greater personal responsibility.

Does Rhode Island’s Pension Fund Performance Justify Its Fees?

David Sirota is shining more light on the Rhode Island pension system’s investment returns—and fees—under Treasurer Gina Raimondo. According to his reporting, the combination of fees and “below-median” returns are costing the state’s taxpayers. From Sirota:

According to four years’ worth of state financial records, Rhode Island’s pension system has delivered an average 12 percent return during Raimondo’s tenure as general treasurer. That rate of return significantly trails the median rate of return for pension systems of similarly size across the country, based on data provided to the International Business Times by the Wilshire Trust Universe Comparison Service.

Meanwhile, the pension investment strategy that Raimondo began putting in place in 2011 has delivered big fees to Wall Street firms. The one-two punch of below-median returns and higher fees has cost Rhode Island taxpayers hundreds of millions of dollars, according to pension analysts.

Under Raimondo’s watch, the state’s pension fund has adopted an investment strategy that heavily utilizes private equity, hedge fund and venture capital investments. The New York Times reported that those alternative investments constitute almost a quarter of the fund’s assets. Sirota writes:

The high fees associated with those alternative investments — costing Rhode Island $70 million in the 2013 fiscal year alone, the Providence Journal reported — are supposed to buy above-average investment performance. However, according to pension consultant Chris Tobe, the gap between Rhode Island and the median, a gap to which the fees contributed, means the state effectively lost $372 million in unrealized returns.

By way of comparison, $372 million represents more than one-half of the entire annual budget of the state’s largest city, Providence. In all, had Rhode Island’s pension system merely performed at the median for pension systems of similar size, the state would have 5 percent more assets in its $7.5 billion retirement system.

Raimondo’s office defends the investment decisions. A spokesperson told Sirota that the strategy needs to be judged over a longer timeline to more accurately assess its effectiveness.

North Carolina Fund Draws Fire For Fees, Conflicts of Interest

North Carolina Treasurer Janet Cowell is the sole trustee of the state Retirement System. That gives her power and control over the state’s pension investments that very few Treasurers share—but it also puts her in a position to take the brunt of the blame when things don’t go as planned.

Cowell is drawing an especially large amount of flak the past few months from critics condemning for her habit of accepting donations from investment firms—and then outsourcing investments to some of those same firms. Tom Bullock of WFAE reports:

During Cowell’s two successful campaigns to be North Carolina’s state Treasurer, 41 percent of her campaign donations came from out-of-state. Much of that money came from investment firms, insurance companies and lawyers…

The national average for state treasurers over the last two election cycles? Just shy of 11.5 percent.

In fact, over that same period 89 candidates vied to be a state’s treasurer. Only four had a higher percentage of out-of-state contributions. But in terms of total dollars, Janet Cowell is squarely at the top of that list.

Cowell declined to be interviewed for this story. Instead, her spokesman, Schorr Johnson, was made available.

“I’ll say that throughout Treasurer Cowell’s term in office she has been a consistent and vocal advocate for public financing for the office of state treasurer,” Johnson says.

Critics say there’s a reason for the influx of out-of-state cash (particularly from New York)—investment firms want the pension fund’s money, and Cowell is the one who makes those investment decisions.

Accordingly, Cowell is drawing fire for the fees paid to investment managers. Critics say the fund’s performance doesn’t justify the fees being shelled out—and some even claim that North Carolina is paying more fees that it’s letting on. David Sirota writes:

According to documents from the North Carolina Treasurer’s office, taxpayers paid $1.6 million in fees (or 0.7 percent of the $230 million Innovation Fund) to Credit Suisse for managing the fund last year. That, however, may not be the entire outlay on fees. As [Ted] Siedle’s report notes, the Innovation Fund directs capital through “fund of funds.” Those investments can also extract fees, which can be hidden in the lower returns passed on to investors.

Assuming these underlying funds charge the standard 2 percent management fee and 20 percent fee for investment performance, and taking into account private equity’s typical transaction, monitoring and operating fees, Siedle estimates that the fund is paying as much as $15.2 million in management fees each year (and that’s without factoring in any additional fees for investment performance). In all, Siedle estimates that since North Carolina’s Innovation Fund launched in 2010, as much as $65 million that was billed as going to local entrepreneurs may have gone to financial middlemen in the form of fees.

[…]

While there is no publicly available independently audited evidence of the Innovation Fund’s returns, fund officials said in 2013 that it had generated a 15 percent return so far. By comparison, the Russell 3000 has generated a 16.5 percent return since 2011, and the S&P 500 has shown a 58 percent return since 2011.

Ted Siedle, whom Sirota mentions above, has claimed for months that North Carolina was under-reporting the fees they paid to managers. He submitted his report to the SEC.

Photo by Emmanuel Huybrechts

Raimondo, Taveras Continue Throwing Pension Punches in Race for Rhode Island Governorship

The pension system continues to occupy center stage in Rhode Island’s race for governor. In one corner is current state Treasurer Gina Raimondo, whose 2011 pension reforms were among the boldest in the country and are the subject of numerous lawsuits from labor groups.

In the other corner in Angel Taveras, the current mayor of Providence who has been critical of the pension system’s investments under Raimondo and has accused the Treasurer of being in bed with Wall Street.

Raimondo released a new campaign ad yesterday – you can watch it above – that responded to Taveras’ claims. The Providence Journal reports:

In a new one-minute TV ad released to the media on Monday morning, Raimondo, the state’s general treasurer, looks into the camera and says of her leading rival in the Democratic primary race for governor:

“I’m Gina Raimondo and you might have heard about Mayor Taveras attacking pension reform, claiming I did it to enrich Wall Street. Nothing could be more wrong.”

“I was 11 years old when my dad lost his job at Bulova. I have never forgotten how hard that was. So when I became treasurer and inherited the pension crisis, I knew if we didn’t face up to the problem a lot of people were going to get hurt. And we couldn’t let that happen” she says in the video.

Raimondo, who is being sued by the state’s public-employee unions, next says: “Our reforms passed by overwhelming majorities in the legislature and, in the end, most of our changes were agreed to by every union except one.”

The Taveras campaign has been extremely critical of the hedge funds investments and accompanying investment fees incurred by the state’s pension system under Raimondo’s watch.

A Taveras spokesperson responded to Raimondo’s new ad:

“As a former venture capitalist who raised fees to Wall Street to $70 million, the Treasurer [Raimondo] has taken over $500,000 from the financial industry. The Treasurer received a no bid, secret contract managing taxpayer money that ensured that her venture capital firm was paid whether they made money or not. Rhode Island deserves a governor who has a record of standing up to Wall Street.”

Raimondo has been adamant that most unions were receptive to her reforms. But several union leaders have gone on record to say that is not the case. As the leaders told the Providence Journal:

Leaders of several of the state’s public-employee unions — including Council 94, American Federation of State, County and Municipal Employees — accused Raimondo of misrepresenting their position in the high-stakes pension fight headed for trial next month.

“Council 94, AFSCME vigorously opposed the pension changes. The treasurer’s process was a farce,” said Council 94 President J. Michael Downey, a Taveras backer.

“Our ideas and suggested amendments were ignored. She broke her word about taking care of people with the least amount of pension benefits, in her words: ‘the little guy.’ And she harmed many municipal employees whose pensions were healthy,” Downey said.

Added Paul Reed, president of the Rhode Island State Association of Firefighters: “She never negotiated with us on any of these things.”

Both of those union leaders support Taveras.

Watch Taveras’ original ad below:

Video: The Evolution of Allocating to Hedge Funds

Bloomberg TV sat down with Agecroft Partners founder Don Steinbrugge to talk about pension fund investments in hedge funds and what it means for both sides.

Other topics touched: hedge funds facing the reality of having to settle for less fees and more transparency to play ball with pension funds, and paying pension fund staff market rates. Watch the video here:

Pension360 has also covered the recent counter-evolution of hedge fund allocation, a trend in which many pension funds across the country are pulling back their hedge fund investments.

CalPERS, for instance, plans to pull back 40 percent of their hedge fund investments in the near future.

Photo by Simon Cunningham via Flickr CC License

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