The California Public Employee’s Retirement System (CalPERS) announced its plan to reduce the number of its external money managers by 50% in five years.
CalPERS is the largest pension fund in the United States with assets worth approximately $300 billion as of March 31, 2015. During a call with reporters, its Chief Investment Officer, Ted Eliopoulos said the pension fund will cut the number of firms managing its investments from 212 to around 100.
CalPERS move was part of its effort to reduce costs as it struggles to fulfill the benefits promised tp government workers. The pension fund has 77% of the money it needs to cover the benefits for local and state employees. CalPERS’ target for investment returns is 7.5%. If the pension fund’s investment returns fall below its target rate, taxpayers will cover the difference.
CalPERS is reducing complexity, cost, and risk
Eliopoulos explained, “CalPERS is taking the next step in what we see as our multi-year effort to reduce risk, cost and complexity in our portfolio so that we can deliver the investment returns that are necessary to meet our obligations.”
According to him, CalPERS will trim the number of its private-equity managers from 100 to 30. The pension fund is investing with the heavyweights in the private equity industry including Apollo Global Management, Blackstone Group, and Carlyle Group.
The pension fund hires outside firms to management its investment its investments in bonds, equities, private equity, real estate, infrastructures, and others. CalPERS indicated in its website that its private equity funds generated $31.4 billion in profits since 1990 until the end of September.
Fees charged by private-equity firms under scrutiny
The Securities and Exchange Commission (SEC) is investigating the fees charged by private-equity firms to clients and companies. The scrutiny is part of the Commission’s review of the industry as mandated by the 2010 Dodd-Frank Act.
According to Eliopoulos, CalPERS will use its existing criteria and processes to evaluate and monitor its current managers and to identify and select new managers in the future.
He said CalPERS save $293 million over the past five years after reducing its money managers from 300 to 200 in 2007. He did provide an estimate as to how much the pension fund would save with the latest planned reduction.
Last year, the pension fund announced its decision to reduce its investments in hedge funds under the Absolute Return Strategies (ARS) program worth approximately $4 billion. The move was also part of its cost-cutting measures.
At the time, Eliopoulos said, “Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale at CalPERS’ size, the ARS program is no longer warranted.”
