Money Management - NCPERS Docs/PPFF/2017/PPT/Parisian and Kelly.pdf• Disinvestment and reallocation. Immediately begin the process of divesting from fund of funds • Disclosure.

Money ManagementHow Can You Beat the Winners?

September 11, 2017

San Francisco, California

2© 2017 Global Governance Advisors. All rights reserved.

Do You Know What YOU are Paying?

SOURCE: https://www.youtube.com/watch?v=RDm5Y51Titg


One Person’s Loss is Another Person’s Gain

Losers (Pensioners) Winners (Wall Streeters)

• Suffering from co-pay “holidays”

• Still recovering from 2007/08

• Ongoing pressure to discard DB plans

• Financial well-being is in jeopardy

• Longest bull markets in history

• Never “really” suffered from 2007/08

• Ongoing pressure to take “more”

• Struggling for larger Hampton homes


How to Get Rich in the U.S.

Forbes 2017

565 Billionaires

24% are from investment industry

Stanford & UChicago Study

Entrepreneurs reap the highest rewards

The vast majority of CEOs do not become uber-rich

Hedge fund managers win big


Top 25 Hedge Fund Managers…..

… Average per/Individual

2009

Annually make more than ALL of the S&P 500 CEOs – Since 2004!


The Hedge Fund Mirage

Simon Lack (1998-2010)

Index reports 7.3%....actual is 2.1%

Generally:• Funds earned $379B in fees

• Real investors earned $70B in profits

• Funds earned 84% of the profits

Adding fund of fund fees (1/3 of funds):• Funds earned $440B in fees

• Real investors earned $9B in profits

• Funds earned 98% of the profitsWhere are their clients’ yachts?


Consider Internal Changes

How can you reduce your pension deficits?

Increase Contributions

Decrease Benefits

Increase Investment Returns

Decrease Operating Costs

Improve Governance

XX√√√


Poor Governance Oversight Costs … A Lot!

(2007) The State Of Global Pension Fund Governance

Poor Governance can cost pensions 1 to 2% annually

1. Financial oversight

2. Board composition and skills

3. Board evaluations

4. Clarity in board and management roles

5. High-performance cultures with competitive compensationAmbachtsheer, Capelle, and Lum

The State Of Global Pension Fund Governance Today

Governance improvements should be a priority


The Roots of Pension Transformations

Peter Drucker – Unseen Revolution (1976)

Clear mission

Strong independent governance function

Ability to attract and retain requisite talent to be successful

Claude Lamoureux – Ontario Teachers Pension Plan (1990-2007)

Reluctantly agreed to become CEO in 1990

First to:

• Buy an operating real estate company

• Go into infrastructure

• Get into derivatives and commodities

Jan 1st, 2017 - $175.6B with $11.5B surplus


Don’t Want to Scare you….BUT

$11.5B Surplus May NOT be Enough!

… Members are Living Longer


What Drove Canadian Transformations?

The need to reduce external investment management feesIncrease in net value added is largely attributable to lower costs of internal management

Median cost is materially lower for internal than for external active management for all asset classes (stock, fixed income, real estate, private equity)1

The need to drive higher investment returnsFunds with more internal management perform better than funds with less

For every 10% increase in internal management, there is an increase of 3.6 basis points in net value added1

1. MacIntosh, J. & Scheibelhut, T. (2012). How large pension funds organize themselves:

findings from a unique 19-fund survey. Rotman International Journal of Pension

Management, 5(1), 34-40.

Governments no longer wanted to be responsible for pension deficits


Reducing Deficits by Internalizing Management

Canada Pension Plan Investment Board:

Looked at $12B infrastructure asset class (2013)

Saved approximately 150bps annually

Saving $189M annually in fees

Approximately $14 Billion in additional value over 35 years

• (assuming savings are reinvested at value-add rate of 3.45%)

“Since inception of the active management strategy…provided $8.9 billion in dollar value-added, after all costs, compared to what a passive portfolio might have provided

over the same time period.”CPPIP 2017 Annual Report


More Objective Proof…

Keith Ambachtsheer (2017):

The 'Canada Model' For Pension Fund Management: Past, Present, And Future (2017)

• 132 Funds (2006-2015)

• 8 Canadian funds (Drucker Criteria)

Canadian funds produced a Net Value Add of 60bps annually above traditional passive funds

Moving investment functions internally can save your fund between 60 and 150bps annually.


1. Review your Mission

When was the last time you did a review?

Is your mission still aligned with your actions?

Have you reviewed supporting: legislation, by-laws, charters, etc.?

Are there impediments?


2. Strengthen Your Governance

When was your last governance assessment?

Governance effectiveness assessment

Revisit/determine required board skills and expertise:• Finance

• Investment, and

• Risk management

• Contract review and negotiation

Strategy on evolving and improving your board capabilities

Revisit your asset class management strategies • Review all external management contracts

• Co-investment opportunities

• Establish investment teams

• Consider internally managing investment functions


The Transformation Experience

Funds that bring asset management in-house

New Model(Internally Managed)

Traditional Model(Externally Managed)

Higher operating costs Lower operating costs

Low external management fees High external management fees

Employees paid well External managers paid VERY well

Better risk mitigation Less risk mitigation


State of Transformed Pension Funds Today

Highly skilled Board members

Recruit top investment professionals

• Internal asset management teams

• Higher salary levels offset by lower external management fees

• Teams are performing better as investors

• Incentives financially align with the mission and vision (success)

Global offices in New York, Hong Kong, Sydney and London.

The above changes have led to Canadian Pension Fund deficits being reduced or almost completely eliminated.


3. Attract and Retain Talent

Are you getting who you need?

What is your compensation philosophy?

• Competitive salary

• Competitive and effective incentive programs

Who are you competing with?

• Acquiring talent

• Losing talent

What is the “total package” you are offering?


For Further Information

Brad Kelly

Partner

Email: [email protected]

Phone: (416) 707-4614

LinkedIn: ca.linkedin.com/in/bradkelly1/

Twitter: @BradKellyGGA

For More Information

CalgaryTorontoMiami New York

© 2017 Global Governance Advisors. All rights reserved.

1Copyright © American Federation of Teachers, AFL-CIO | August 17

The Big Squeeze

How Money Managers’ Fees Crush State Budgets and Workers’ Retirement Hopes

The pension “crisis”

2


Myth:

• Pension funds are underfunded because public employee benefits are too generous

3

Reality:

• Many pension funds are underfunded because of sponsors’ failure to make payments, economic events, and EXCESSIVE FEES to Wall Street

Alternative investments

• Hedge funds• Private equity• Co-mingled real assets

What do these have in common? Fee structure

4


“Two and Twenty”

• 2% management fee • 20% performance/incentive fee• Hidden fees

5

6


Why do pension funds invest in alternatives?

• Increase in alternatives coincides with two events: Dotcom bubble in 2000, Great Recession of 2008-2009

• Diversification

• Achieve higher returns

7

Alternative investment fees

• Often undisclosed—even to investors• Hidden fees

8

• Especially a problem for fund-of-funds

• Are fees justified by returns?


Lack of transparency

9

“In moving more to alternatives, public plans have taken nearly 25 percent of their investment assets off the grid, a move that can shortchange participants, the public and sometimes trustees of important information. It is a disturbing development, especially because private equity and other alternatives are the most expensive asset classes of pension funds.”

--Pensions & Investments

Who benefits?

10


Who benefits?

11

• Most recent Forbes’ billionaires list contained at least 50 U.S.-based alternative asset managers

Who bears the risk?

12


OUR RESEARCH

13

How much are pension funds really paying?

14

$-

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

Year 1 Year 2 Year 3 Year 4 Year 5

Bill

ions

12 public pension funds: Estimated alternative investment fees, five most recent fiscal years

Estimated hedge fund fees Estimated private equity fees Estimated co-mingled real assets fees


What if fees were lower?

15

• Two and twenty = arbitrary• What if fees were cut in half?

Fees matter• Every dollar spent in fees is a dollar that could stay in the pension fund• Dollars that stay in the pension fund compound and grow• Excessive alternative investment fees are a significant contributor to pension

underfunding

Our findings

16

• The 12 pension funds in our study would have saved $3.8 billion per year in alternatives fees over the last 5 years

• The average pension fund in our study would have saved an estimated $317 million per year by cutting alternatives fees in half, or $1.6 billion over the last five fiscal years

• The average pension fund will save an estimated $1.8 billion five years after adopting 0.9 and 9, $8 billion after 15 years, and $30 billion after 30 years


17

$0

$5

$10

$15

$20

$25

$30

$35

1-year 5-year 10-year 15-year 30-year

Bill

ions

Average pension fund projected compound growth from cutting alternatives fees in half

18

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Mill

ions

MPSERS: Estimated alternatives fees paid, 2011-2015

Estimated hedge fund fees Estimated private equity fees Estimated co-mingled real assets fees


19

$0

$5

$10

$15

$20

$25

$30

$35

1-year 5-year 10-year 15-year 30-year

Bill

ions

MPSERS projected compound growth from cutting alternatives fees in half

Pension funds should challenge the status quo

20

• Disinvestment and reallocation. Immediately begin the process of divesting from fund of funds

• Disclosure. Adopt policies requiring full accounting, management and disclosure of all fees by alternative investment managers. Fee disclosure should be made publicly available.

• Fee limits. Adopt specific policies with respect to acceptable fee limits. We encourage pension funds to consider lowering fees even further, exploring or developing alternative fee structures, along with hurdle rates and high water marks.


Challenging the status quo

21

• Fee compilation. Support the development of a nonprofit organization to which pension funds can report all fees paid to investment managers and fee terms by investment. The nonprofit organization would make this data publicly available without naming each pension fund.

• Legislation. Develop and support legislative policies that require annual public disclosure of all fees by fund and by asset manager, and that place a cap on fees paid to asset managers.

Case study: New Jersey

22


Thank you

23

Elizabeth [email protected]

Money Management - NCPERS Docs/PPFF/2017/PPT/Parisian and Kelly.pdf• Disinvestment and reallocation. Immediately begin the process of divesting from fund of funds • Disclosure.

Documents