The Impact of Management Fees on Pension Fund Value

EXECUTIVE SUMMARY

At Comptroller Stringer’s request, the Bureau of Asset Management (BAM) analyzed the total dollar impact of active management fees on the value of the New York City public pension funds over the last 10 years. This required a three-step process: First, BAM staff analyzed total Fund performance before and after fees. Second, analysts imputed the total dollar effect of fees on the Funds over the past ten years. Third, analysts isolated the portion of performance that is due to external manager results vs. benchmark returns.

While the Funds grew at a healthy rate in excess of 6.5% for the ten years ended December 31, 2014, this analysis found that, once all fees have been deducted from investment results, external managers fell more than $2.5 billion dollars short of benchmark returns over the ten year period

• After removing the positive contribution from asset allocation (a trustee/BAM decision), the combination of private and public asset class manager net of fees performance resulted in a shortfall vs. benchmark of $2.5 billion over the ten year period.
• Managers of private asset classes such as private equity, hedge funds and real estate fell $2.6 billion short of target benchmarks after fees.
• Over the same period, managers of public asset classes exceeded benchmark returns by an estimated $40 million, even after the impact of fees is assessed. Notably, the impact of fees offset more than 95% of the $2.063 billion in gross (of fees) value added vs. benchmark by public market classes.
• These results provide substantial rationale for Comptroller to work with the boards to rethink the Funds’ approach to active management and decision making across the five pension systems.