– NYC Pension Earns $40 Million Over 10 Years, Pays Fund Managers $2 Billion (The Reformed Broker, April 9, 2015):
“We asked a simple question: Are we getting value for the fees we’re paying to Wall Street?” Mr. Stringer said. “The answer, based on this 10-year analysis, is no.”
The party is over.
At great political risk to his own ambitions (given the local campaign-funding base), New York City Comptroller Scott Stringer took a look at how much the city’s been paying to Wall Street (or Greenwich) to manage its money over the last decade and what they’ve gotten in return.
It doesn’t look good.
via the New York Times (emphasis mine):
over the past 10 years, the five pension funds have paid more than $2 billion in fees to money managers and have received virtually nothing in return…
Until now, Mr. Stringer said, the pension funds have reported the performance of many of their investments before taking the fees paid to money managers into account. After factoring in those fees, his staff found that they had dragged the overall returns $2.5 billion below expectations over the last 10 years.
Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97 percent — has been eaten up by management fees, leaving just $40 million for the retirees, it found.
It’s bordering on parody. They report investment returns gross of fees and then add the fee information onto their statements as footnotes. Do you know of anyone who can eat their returns gross of fees and taxes? I don’t.
We’re talking about a pension system with assets totaling $160 billion, with the retirements of more than 700,000 city workers on the line. And the financial sophistication level on display here is effectively zero. My kids’ 529 plans are better structured than this.
The article states that about 80% of the pension’s portfolio is invested in plain vanilla assets like stocks and bonds, while 20% is alts, private equity, etc. And they’ve earned nothing after doling out $2 billion in fees. My friend Ben Carlson will probably read this and not be terribly shocked, given what he’s seen in the institutional space. But I am.
As a side note, I once sat in on a breakfast meeting hosted by a hedge fund networking group where a highly-ranked woman from the NYC pension complex walked the attendees through how hard it is to get a foot in the door to manage a portion of their money. The room was filled with startup hedge funds and she basically told them they don’t stand a chance. “The thing is,” she explained, “once a manager gets in, which could take up to five years, they very rarely get replaced.”
Maybe this time it will be different.