US - The California Public Employees' Retirement System (CalPERS) have planned to pay fund managers on a performance only basis because of underperformance in a move that could potentially shake up the industry.
The proposal was an information item presented to the CalPERS Investment Committee on Monday and was part of a proposed restructuring of the $1bn Global Equity asset class. This allocation includes mostly stock index funds managed by external managers and internal staff.
A spokesperson for CalPERS said the giant fund had found it was paying external managers fees and performance incentives but essentially getting beta and not enough alpha in return.
“The staff proposal is to move non-alpha-producing externally managed funds under management by CalPERS staff, which already manages index funds as well and to put remaining external managers on a performance-only basis, no alpha, no pay,” said the spokesman.
The Board has planned to take another look at the proposal in November and the details were expected to be worked out thereafter.
Historically CalPERS paid external managers management fees pegged to the amount of the retirement system's assets.
That approach was revised so the fees paid were scaled down and new incentive performance fees offered. Managers who failed to beat the benchmarks still received management fees even if they fell under the benchmark.
If the change in fee structure was to go ahead it could mean other pension funds may adopt the practice.
California State Teachers' Retirement System (CalSTRS) said it would be interested in the concept.
A spokeswoman for CalSTRS said: “Of course, we would immediately seek this type of fee structure as well. While our management costs are among the lowest in our peer group, we would welcome the opportunity to cut costs even more.
"The balance would be in rewarding higher performance while keeping within prudent levels of risk.”
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