On the one hand, a growing number of public pensions and sovereign funds are building up their internal capabilities to sidestep third party fund managers. On the other hand, there’s the Massachusetts Pension Reserves Investment Management Board. It seems to be doing the opposite.
PRIM manages the $50 billion in the Pension Reserves Investment Trust. PRIT was set up in 1983 to pool the Commonwealth’s pension assets from teachers, state employees, and local funds in order to achieve economies of scale and help the local funds meet their liabilities through professional investment management.
So why can’t the fund keep any of its senior investment professionals employed?
The latest departure is Stan Mavromates, the fund’s Chief Investment Officer, who is leaving this month to join Mercer. Other recent departures include: the Director of Finance; the Head of Private Equity; an SIO in Private Equity; the Chief Operating Officer; the Deputy CIO – who is leaving for maternity – is yet to be replaced; and... Actually, you know what, rather than going through all the departures, let’s just say the following: The only SIO at MassPRIM remaining will be the Real Estate and Timber guy. That’s it. All the other SIOs are gone.
Mass PRIM has become a revolving door; people come to advance their careers rather than advance the interests of the organization. And that’s not good. Not good at all.
But fear not! We may have a sick patient, but I can diagnose the problem. It’s simple in fact: compensation.
Consider this: the top five investment staff in a Canadian pension fund make, on average, $1.5M per year, while the top five in a US pension make $372k. MassPRIM’s top two employees make...$245k. And if we throw in the next three, we’d undoubtedly be down around $200k for the average. Is there any wonder PRIM can’t keep these people employed? There’s simply too many better offers out there.
Perhaps we should take a second to investigate the symptoms of this illness? Good idea.
Not only is PRIM woefully understaffed, but it has become overly reliant on external consultants and managers. The fund has no choice but to outsource almost everything it does to others, which is VERY expensive. The total cost of managing PRIT (including management fees, custodial and overhead charges) was $250 million (50bps). Of that, ~228 million was paid to external parties for investment related services and advice. That’s a lot of money.
Here’s what I think in terms of a remedy: If PRIM spent another $28 million on internal talent and operational capabilities, that $228 million in external fees could be reduced to $150 million (holding returns constant) for a net gain of roughly $50 million yearly. Crazy? Not at all.
Take OMERS as a useful comparable. It’s got a similar AUM, and, like PRIM, it was established to serve local government employees, representing 947 employers and almost 420,000 members. So it’s got a somewhat similar governance and structure. Here’s a direct quote from the fund’s 2011 annual report:
“We are making significant progress in actively managing an increasing proportion of OMERS investments internally to enhance returns and reduce investment costs. The principal drivers are increased direct drive management of foreign publicly traded equities and private equity investments. Our long-term goal is to have 90 per cent of total Fund assets directly managed by 2015. This is expected to result in net savings of over $275 million over the next four years.”
Research now shows, unequivocally, that sophisticated in-house operations can save money. You don’t have to do it all in house – in fact you don’t want to do it all in house – but there is good reason to consider some internal management. The biggest cost savings tend to be from private equity, which is why the biggest and smartest pension funds are aggressively in-sourcing that asset class. But there are plenty of savings from fixed income (3bps for in-house versus 18 bps for external) and equities (10bps versus 40 bps).
But here’s the rub, folks: In-sourcing may be far less expensive than outsourcing, but you can’t do it without smart and creative people. And that means you have to pay.
So I have this message to pass along to the Mass PRIM Board: You. Have. To. Pay.
And, more than that, your decision to NOT pay market wages is the same as deciding to pay Wall Street big salaries. Do you get that? Let me say it again: Research shows internal asset management is cheaper. So $X spent on in-house operations will save you something like $3X on external fees. So when you make announcements in the press that you want to ‘invest and spend money wisely’ all the while dramatically underpaying your people...I have to scratch my head. What you’re actually doing is announcing your intention to overpay Wall Street. I’m fairly certain that wasn’t your intention.
Anyway, if I’ve managed to pique your interest without insulting you too severely – sorry about that by the way, I get passionate about this stuff. Please don’t take it personally – Please read this. And then please read this. And good luck.
