The California Public Employees’ Retirement System (CalPERS) has cut the cost of its annual investment operations by $134 million over the last five fiscal years.
CalPERS has been steadily cutting costs by reducing the number of GP relationships, moving its assets from external managers to internal, where possible, and negotiating for lower external management fees.
For the current 2015-2016 fiscal year, CalPERS estimates it will save $62 million in costs, mainly due to improved fee structures on new fund commitments.
In the 2009-2010 fiscal year, CalPERS’ investment costs across asset classes, excluding profit-sharing fees like carried interest, were $1.02 billion. These expenses increased slightly to $1.04 billion in 2010-2011, but dropped again to $973 million in 2011-2012, $949 million in 2012-2013, $932 million in 2013-2014 and $888 million in 2014-2015.
Specifically in private equity, in the 2014-2015 year, the most recent time period for which figures were available, CalPERS paid $414 million in external management costs and $700 million to GPs in carried interest.
Its net gains from private equity reached $4.1 billion. The pension realised a 14.4 percent return on its private equity investments over the past five years, and an 11.9 percent return over the past 10 years.
Independent benchmark provider CEM found that CalPERS’ overall portfolio costs about $52 million less annually to manage than the portfolio of its peers, which consist of 14 pension funds with a median of $184 billion in assets under management. It attributed CalPERS’ relatively low investment cost to the pension’s asset allocation style.
CalPERS’ portfolio allocated 31 percent to external active management, which tends to be the most costly strategy, compared with 34 percent by its peers and 72 percent in the US overall. It also allocated the most, at 36 percent, to internal passive management, which tends to be the cheapest strategy, compared with 23 percent by its peers and just 4 percent in the US.
“I am optimistic we will continue to make meaningful reductions in the future,” CalPERS chief investment officer Ted Eliopoulos said.
CalPERS is focusing on financial reporting, cost awareness and management, fee reductions and benchmarking to continue its effort in cutting costs. One of its upcoming priorities, it said, is to leverage the new Institutional Limited Partners Association fee template introduced last year.