CalSTRS reviews cost of external managers

The $150bn pension will consider more opportunities for internal management of investment assets as it looks for ways to cut costs.

The California State Teachers’ Retirement System, the second largest public pension in the US, will be keeping a lookout for opportunities to manage investment assets in-house to try and cut the costs of external management.

According to a report presented by the pension’s chief investment officer Christopher Ailman, CalSTRS spent $169.4 million on external asset management in 2010, which includes management fees, investment consultants, independent fiduciary fees and market data services. The costs include all asset classes.

This doesn’t mean that CalSTRS will be looking to cut back on private equity fund investments in favour of direct investments, according to a pension spokesperson. Specifically for co-investments, the pension is at its 10 percent allocation and “will most likely remain at that level for a while”, the spokesperson said.

The pension is conducting a review of internal versus external management costs that could result in “more assets being managed internally at a significant cost savings”, according to pension documents.

As part of the effort to cut costs, CalSTRS also has been negotiating with managers across asset classes to cut fees. This includes negotiating fees in private equity “as contracts come up for renewal or arise as part of new deals”, the pension spokesperson said.

Other US pensions have been negotiating for private equity fees cuts, including the California Public Employees’ Retirement System, which has achieved millions of dollars in fee savings.

The pension’s private equity portfolio, launched in 1988, has been a strong performer and has roared back from its lows of a few years ago just after the credit crisis began. CalSTRS private equity programme returned 17.2 percent for the 12 months ending 30 September, 2010. The pension reported a 27.6 percent loss in 2009.

The market value of the portfolio was $20.8 billion as of 30 September. The total value of the portfolio, including market value plus distributions, was $40 billion. The portfolio has 292 investments, including co-investments, and has about $40 billion of capital committed and a 13.5 percent internal rate of return since inception.

CalSTRS also revealed its five largest buyout relationships, with The Blackstone Group leading the pack with about $2.7 billion of total exposure, followed by TPG Capital with $2.3 billion, CVC Capital Partners at $1.5 billion, First Reserve at $1.4 billion and Providence Equity at about $1 billion of total exposure.

In the second and third quarters of 2010, CalSTRS made six commitments, including three co-investments of $28 million to BrightSource Energy, $25 million to FHC Holdings and $39 million to Almatis Holdings; a $200 million commitment to Fortress Credit Opportunities Fund II; $50 million to JMI Equity Fund VII and $70 million to Spectrum Equity Investors VI.