LPs slam critical study on management fees

State pension plans are finding fault with a study by two Maryland think tanks that concludes alternative asset fund managers are not worth the fees they charge.

Fresh research from the Maryland Public Policy Institute and the Maryland Tax Education Foundation argues that pension plans are paying too much in fees, and should consider passive index investing to boost returns. 

The study comes at a time when limited partners have become more sensitive to management fees, but isn’t being met with much praise from the pension plans it’s directed at. 

“History has shown that in our actively managed asset allocations, that we have done better than the public benchmarks net of fees, which proves that the fees we pay, pay for themselves,” said Michael Golden, spokesperson for the $40.6 billion Maryland State Retirement and Pension System, which has a 6 percent allocation to private equity. 

The study concluded that on average, the 10 states paying the most active management fees had an annualized five-year return of 1.34 percent compared to 2.38 percent for the 10 states paying the lowest in fees. The five states paying the highest fees were South Carolina, Missouri, Pennsylvania, North Carolina and Maryland.

Over a 10-year time horizon ending June 30, 2012, Maryland’s pension system generated an 8.56 percent return on its private equity holdings compared to a 5.33 percent return on its S&P 500 Index investment program. 

Golden said the study failed to make an apples-to-apples comparison of state pension plans, noting that “not all pensions report fees paid in their entirety”. 

In an email to Pensions & Investments, a spokesperson for the North Carolina Retirement System said, “the study used incorrect numbers that essentially double-counted the North Carolina pension fund's management fees, skewing them by $218 million”.