Higher Fees Are Fruitless for Pension Funds, Think Tank Says

Categories: National Developments
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Chief Investment Officer  by Sage Um, August 4, 2015

The Maryland Public Policy Institute has released a study critiquing active management in all forms—during the post-Crisis bull market, at least.

It’s the oldest story in the book: Pension funds are paying too much to Wall Street—or so says one think tank, at least.

According to a new study by conservative Maryland Public Policy Institute (MPPI), state pension funds that paid the highest in fees recorded inferior average returns than those with the lowest fees over five years ending June 30, 2014—a period that encompasses one of the strongest bull markets in history.

Specifically, the 10 states writing the biggest checks to Wall Street managers earned annualized five-year returns of 12.44% over this timeframe, the report said. This falls behind the 12.77% net-of-fees returns at the 10 funds paying lower fees.

“The investment policies suggest either a lack of numeracy or a decision process not driven by the best interests of the pensioners and taxpayers,” said Jeff Hooke, a fellow at MPPI.

Still, the institute found 33 state funds surveyed paid $6 billion in fees over the last fiscal year.

The report claimed a majority of public money managers consistently underperformed benchmarks over the same five-year period.

Some 84% of domestic equity funds and 73% of managed fixed income funds fell short of their benchmarks, proving that pension funds are “paying sizeable fees for the privilege and bearing substantial transaction costs” for the index.

Alternatives managers also disappointed, the report said, with state pensions’ hedge fund performance trailing behind a passive index by 635 basis points net of fees over the five years ending June 30, 2014.

Private equity returns also underperformed the S&P 500-plus-3% benchmark by 511 basis points net of fees, MPPI found.

“This is not a glowing endorsement for Wall Street advice, reminding one of author Fred Schwed Jr.’s critique of Wall Street, when he asked, ‘Where are the customers’ yachts?’” the report said.

These sentiments and figures reflect state pension funds’ recent moves to shake up the fee status quo.

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