Today, in “Posted Without Comment”

Dave in reply to DavidTC says:

@davidtc

Or, hell, with that much money, actually *hiring someone full-time*. Especially as management fees are apparently a *percentage* of the total, which is completely insane on that much money.

% of assets under management is the standard in this market.

Why do you think it’s insane? Break down the total into an annual number, say $200 a million a year. Now, let’s assume that there are 20 different managers that the pension fund has hired as outside advisers (not unreasonable). Personally, I think this number is too low, but work with me for the sake of argument.

Now you’re $200 million per year turns into $10 million per year per money manager. By manager, I don’t mean “individual”. I mean an organization whether it’s Goldman Sachs Asset Management, Prudential Real Estate Investors, Bain Capital, BlackRock, Blackstone or anything in between.

That money represents revenues. Those revenues have to cover the expenses including all the salary and overhead attributed to everyone from the mailroom, administrative staff, entry-level analysts, asset managers, portfolio managers, legal compliance, relationship managers, people that oversee acquisitions and disposition, some general corporate overhead (senior management) and any expenses related to occupancy (i.e. rent, taxes, etc.).

Yes, these firms will profit, as they should, but the impression that the investment managers are screwing over clients by earning excessive fees not only flies in the fact of the Bloomberg article, but also the nature of the investment management itself, a business that is far more aligned with the institutional mindset of the pension fund than the more free-wheeling side of Wall Street. Most of the ones I deal with on the real estate side aren’t even technically “Wall Street” firms.

These firms are subject to a number of regulations and have a fiduciary responsibility to their clients, and what’s most stunning to me about Stringer is how badly he has forgotten this. He’s foisting his own ignorance upon an invisible enemy that is hardly the problem.

Could the pension funds push harder on fees? Yes, but looking at aggregate numbers don’t help determine where they can push. I know that the alternative investment vehicles are more expensive wrt fees, but this makes sense because the investment managers are moving farther out on the risk spectrum in order to achieve returns higher than typical index returns.

As a last point, the analysis for private equity and real estate is going to reflect the HORRIBLE returns in the 2008 and 2009 period, returns that had less to do with poor management and everything to do with capital markets conditions that took a nosedive (although one can argue the wisdom of the acquisitions that attributed to the losses).

While this isn’t a New York example: the two major California pension funds, CalPERS and CalSTRS, had a combined equity exposure of $700 million in the Stuyvesant Town deal when Tishman Speyer bought it at the height of the market in 2006 for $5.4 billion. The entire equity position was wiped out.Report