managing costs and optimizing outcomes docs/annual... · managing costs and optimizing outcomes...

National Conference on Public Employee Retirement SystemsNational Conference on Public Employee Retirement Systems

Managing Costs and Optimizing Outcomes

NCPERS 2018 Annual Conference & ExhibitionMay 13 – 16New York, NY

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We work with funds to capture key cost and performance data.

We provide our clients with the following types of analysis, research, and opportunities for sharing and learning.

Investment Benchmarking Pension Administration Benchmarking Global Best Practices

Cost in the context of performance and risk:

Total returns Policy returns Value added Asset risk Asset liability mismatch risk Governance and Oversight

Cost in the context of member service:

Channels Timeliness Flexibility Content Capability Governance and Oversight

A window on innovation and best practices:

Share experiences and learn from others

Collaborate Build on existing knowledge

and good practice Innovate

CEM Services


Asia-Pacific8 Funds = US $853 billion in AUM

Africa and the Middle East6 Funds = US $236 billion in AUM

Latin America47 Funds = US $490

billion in AUM

North America174 U.S Funds (73 public) +

79 Canadian Funds = US $4.95 trillion in AUM

The CEM Global DatabaseEurope78 European Funds = US $3.22 trillion in AUM


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Pension Administration Global Trends

Cost Effectiveness

Member Communication and Service

System Modernization


Cost EffectivenessBetter cost effectiveness is about improving the cost‐benefit dynamic, rather than just reducing costs.

Pension systems are striving to deliver quality service while managing costs by focusing on:

Continuous Improvement Straight through processingOnline member functionality


Main drivers of communication to pension plan members

Service• Plan-specific info• General pension info• 2-way communication

Engagement• Start a conversation• Increase trust/loyalty• Deepen relationship• Financial wellness

Fiduciary• Meet/exceed fiduciary

requirements• Minimize legal claims

Advocacy• Brand Ambassadors• Plan sustainability• Economic impact


Global DB plan administration has become more member‐centric.

$5.00

$10.00

$15.00

$20.00

$25.00

2008 2009 2010 2011 2012 2013 2014 2015 2016

Cost per M

embe

r (USD

)

Global DB pension plans are spending more on member communication

Member Communication

89%

66%

43%

4%

2017

% of DB Plans offering key online functionality

Benefit calculator linked to members' salary and service data

Register for counseling presentations

Register for counseling sessions

Live chat

50

55

60

65

70

75

80

85

90

2011 2012 2013 2014 2015 2016 2017

Member Service levels related to mass communication have improved

Website News and targeted communication


$0

$10

$20

$30

$40

$50

$60

2010 2011 2012 2013 2014 2015 2016Member Transactions $19 $18 $19 $20 $21 $19 $19Member Communication $17 $17 $17 $18 $18 $18 $19Collections and Data $7 $7 $8 $8 $8 $9 $8Governance $10 $10 $10 $11 $11 $12 $12Major Projects and IT $21 $33 $33 $38 $44 $53 $55Support $22 $22 $23 $23 $23 $24 $25

Cost Per Member by Admin Activity

IT System Modernization Programs

Top Challenges• Change leadership and management• Program governance and risk

management• Vendor selection and management• Data conditioning and quality• Risk management

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National Conference on Public Employee Retirement Systems

U.S. Public Fund Investment Performance 1998‐2015


Value Added: Long term Global CEM Results

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Active management, on average, added positive gross and net value added.

Funds with more internal management had similar gross value added, but more net value added, than those with less.

Larger funds, above and beyond their use of internal management, had similar gross management but slightly more net value added, than smaller funds.


U.S. Total Net Returns 1998‐2015

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Total AUM Public Corporate

Under $2 Billion 6.67% 6.93%

$2‐$10 Billion 6.72% 7.12%

Over $10 Billion 6.77% 7.69%

Corporate plans outperformed primarily due to a move into long bonds over the period that paid off.

On average, the public fund set includes 14 funds under $2 billion, 27 funds between $2 and $10 billion, and 32 funds over $10 billion AUM.


Different size public funds achieved similar results in different ways.

Relative to the total public fund average return of 6.76%:

* Asset Mix is positive for all, since all size bands would have outperformed the public average had they maintained their average asset mix for the entire period. The impact of changes over years is captured in timing.

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Total AUM Average Asset Mix Impact*

Timing (inter‐year)

Asset Class ReturnImpact

Other (intrayear timing, overlays)

Total Differences

Under $2Billion

+0.13% ‐0.05% ‐0.56% +0.28% ‐0.09%

$2‐$10Billion

+0.01% ‐0.05% +0.09% ‐0.08% ‐0.04%

Over $10 Billion

+0.24% ‐0.30% +0.05% ‐0.02% +0.01%


Asset class net returns varied significantly within illiquid assets.

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Total AUM

U.S.Large Cap

U.S.Small Cap

Non U.S. Stock

U.S.Broad Fixed

U.S.Other Fixed

Real Estate

Listed REITs

HedgeFunds/ TAA

Private Equity

Under $2Billion

6.4% 6.4% 5.9% 5.5% 2.8% 5.2% 9.6% 4.9% 3.7%

$2‐$10Billion

6.8% 7.9% 5.7% 5.7% 4.2% 7.0% 10.4% 4.2% 10.1%

Over $10 Billion

6.6% 7.2% 5.8% 5.8% 4.3% 7.2% 8.1% 5.8% 11.4%


Cost differences explain some of the differences in net return. Larger funds tend to have lower costs as a percentage of assets.

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Total AUM

U.S.Large Cap

U.S.Small Cap

Non U.S. Stock

U.S.Broad Fixed

U.S.Other Fixed

Real Estate

Listed REITs

HedgeFunds/ TAA

Private Equity

Under $2Billion

0.27% 0.69% 0.55% 0.20% 0.41% 1.04% 0.73% 3.12%¹ 5.33%¹

$2‐$10Billion

0.25% 0.58% 0.49% 0.19% 0.25% 1.06% 0.60% 2.71%¹ 4.71%¹

Over $10 Billion

0.21% 0.53% 0.36% 0.17% 0.28% 0.96% 0.34% 2.63%¹ 3.88%¹

¹2014‐2015 average, includes performance fees/carried interest. Other costs are 1998‐2015 average


Funds under $2 Billion had an advantage from asset mix.

< $2 Billion Funds benefitted from having less U.S. Other Fixed Income and less Private Equity (for them a low performing asset class).

> $10 Billion funds benefitted from having more Private Equity (for them a high performing asset class).

Funds between $2 and $10 billion were disadvantaged by having the most Hedge Funds.

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Total AUM

U.S.Large Cap

U.S.Small Cap

Non U.S. Stock

U.S.Broad Fixed

U.S.Other Fixed

Real Estate

Listed REITs

HedgeFunds/ TAA

Private Equity

Other

< $2Billion

32% 8% 20% 25% 3% 4% 1% 3% 2% 4%

$2‐$10Billion

29% 6% 20% 23% 5% 4% 1% 5% 4% 4%

> $10 Billion

33% 4% 19% 23% 5% 5% 1% 3% 6% 3%


Timing over the period had the largest (negative) impact on funds over $10 Billion.

Over $10 billion funds increased Private Equity and Hedge Fund allocations over the period. Those asset classes performed relatively better in the earlier years.

Funds under $2 billion engaged in a ‘flight to quality’ in 2008‐2009, moving generally towards more fixed income, moving fixed income back towards core U.S. fixed income, tilting U.S. stock from small to large cap, and reducing exposure to alternatives. This appears to have had an overall mild positive impact.

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Rebalancing and a ‘flight to quality’ for funds under $2 billion

Rebalanced U.S. Large Cap and Non‐U.S. Stock Sold/reduced U.S. Small Cap, Other Bonds, Alternatives Bought more core U.S. Broad Bonds

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U.S. Large Cap

U.S.Small Cap

Non U.S. Stock

U.S.Broad Fixed

Other Fixed

Listed REITs

HedgeFunds/Private Assets

2007 Asset Mix

34% 10% 20% 21% 4% 1% 10%

Implied 2008 Mix due to returns

29% 9% 16% 29% 6% 1% 11%

Actual 2008 Asset Mix

34% 6% 20% 32% 3% 1% 5%


Implications for funds under $2 Billion: Don’t chase into asset classes that are cost prohibitive to implement.

A major reason for lower performance in private assets was much higher cost implementation structures (Fund of Funds).

Funds under $2 billion offset some of this by having less Private Equity.

There are alternatives to private market assets: Small Cap U.S. Stock had a 91% correlation to Private Equity over the period(and was a better performing asset class for under $2 Billion funds). Listed Real Estate had a 92% correlation to private Real Estate (and was a better performing asset class for all size cohorts).

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Implications for funds under $2 Billion: Consider asset mix and rebalancing policies and discipline.

Funds under $2 billion seem to have reacted more than the rest of the group to market conditions in the GFC, either not rebalancing, or shifting towards ‘safer’ asset classes. In future investment cycles, similar behavior could have significant negative long‐term return implications.

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Implications for $2‐$10 billion funds: Consider acting like a larger fund

Funds are most likely to use internal management for fixed income, followed by public stock.

If your illiquid portfolios look more like a small fund (Fund of Fund implementation) than a big fund, question whether it makes sense.

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0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0% 0% ‐ 10% 10% ‐ 25% 25% ‐ 70% 70% ‐ 100%

Percen

t of fun

ds in

rang

e

Percent assets managed internally

Use of Internal Management: all funds near $10 Billion


Implications for $2‐$10 billion funds (in particular, but generally for all funds): Hedge Fund portfolios

Hedge Funds were a lower performing asset class, and $2‐$10 billion funds had the biggest exposure to them.

Other CEM research has suggested Most pension funds had Hedge Fund portfolios that produced results that looked like stock‐bond mixtures, but with significantly lower returns. Fund of Funds underperform direct Hedge Fund portfolios. The best performing Hedge Fund portfolios had lower correlations to stock‐bond mixtures. Funds with Hedge Fund programs need above average insight into the sources of return in their portfolios.

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Implications for funds over $10 Billion: Better asset class performance has historically come from lower cost implementation.

More internal management (significantly associated with improved net value added)

Less Fund‐of‐Funds, more Co‐Investment (better performance in illiquid asset classes)

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Copyright © 2018 by CEM Benchmarking Inc. ('CEM').

Although the information in this document has been based upon and obtained from sources we believe to be reliable, CEM does not guarantee its accuracy or completeness. The information contained herein is proprietary and confidential and may not be disclosed to third parties without the express written mutual consent of CEM.

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