Wall Street Math: Charge $2.5 billion in management fees and generate nothing in return

[Axulus]

Scott Evans, the comptroller’s chief investment officer, had to work backward from the footnotes in the reports to estimate just how much had been paid each year to a long list of Wall Street firms that managed investments in the public markets. He then calculated that those fees, combined with the significant underperformance of the investments in private assets like real estate, amount to a whopping negative — a drag of more than $2.5 billion — since the end of 2004.

http://www.nytimes.com/2015/04/09/n...w-york-city-pension-gains.html?referrer=&_r=1

When will these cities and states wise up and realize that there is no gain to be had with actively managed funds? Hire a few actuaries, a few finance people, tell them to invest only in passive index funds and find the appropriate percent allocation of stocks (both domestic and global), bonds (combination of government bonds, domestic and global, and corporate), and any other asset class that is considered to enhance the risk adjusted performance of the portfolio.

 

[Loren Pechtel]

Yeah, they really need to start compensating investment professionals based on how they do compared to the selected risk level rather than simply on the amount under management.

 

[TV and credit cards]

Lovely thoughts. I can't imagine politicians would hold on to their jobs for very long if they pushed for a pay for performance structure for money managers or simply to cut the manager out of the picture altogether. No. It will be long after the individual investor learns to move away from money management (via anyone willing to hang a "Financial Advisor" shingle out) that city and state pensions will. I wonder how hard the likes of AARP is advocating for this? I don't know much about the organization but it seems this would be right up their alley.
Money management is the biggest ripoff of the working class.

 

[dismal]

It's pretty hard to (prudently) manage large amounts of money in the public market and not start to look like the market.

The question here would be what the fee arrangements are and how they compare to something like a Vanguard index fund, which IIRC is around 0.2%

 

[Tom Sawyer]

In the spirit of capitalism, I am willing to undercut Wall Streets price and will accept $2.4 billion in exchange for doing nothing.

 

[dismal]

In the spirit of capitalism, I am willing to undercut Wall Streets price and will accept $2.4 billion in exchange for doing nothing.

Perhaps you joke but the question should be why this does not happen. My back of the envelope math suggests they are paying ~2% fees to people managing public instruments.

There are certainly people willing to do it for a lot less.

This plus the underperformance in the private funds suggests the main takeaway here is that the NYC pension fund employs some pretty crappy managers.

 

[Nice Squirrel]

In the spirit of capitalism, I am willing to undercut Wall Streets price and will accept $2.4 billion in exchange for doing nothing.

Perhaps you joke but the question should be why this does not happen.

[YOUTUBE]https://www.youtube.com/watch?v=g4Uv4ftekaI[/YOUTUBE]

 

[ksen]

Just posting here to remind myself to find the name of the book I read not too long ago about how wall street banks spend time thinking up complex instruments that even they don't understand and then sell to investors for large fees.

 

[Nice Squirrel]

Just posting here to remind myself to find the name of the book I read not too long ago about how wall street banks spend time thinking up complex instruments that even they don't understand and then sell to investors for large fees.

Kind of how I am on hold with CenturyLink to have them explain why they doubled my bill.

 

[ksen]

Yes, kind of like that.

 

[Nice Squirrel]

Been 25 minutes and now on my way to my third representative. I let them know that I can get faster fiber cheaper.

 

[Tom Sawyer]

In the spirit of capitalism, I am willing to undercut Wall Streets price and will accept $2.4 billion in exchange for doing nothing.

Perhaps you joke but the question should be why this does not happen. My back of the envelope math suggests they are paying ~2% fees to people managing public instruments.

There are certainly people willing to do it for a lot less.

This plus the underperformance in the private funds suggests the main takeaway here is that the NYC pension fund employs some pretty crappy managers.

It would seem that they'd be able to shop around. While there are some fixed costs to having a company which manages investments, I can't see why there's be too much of a difference in those costs if they're managing $100 million in funds or managing $1 billion in funds. I'd figure that a business model of "We will charge you $X per month and Y% of your profits in order to manage your money". If the fund doesn't make a profit, the investment company doesn't make a profit and if the fund makes money then the investment company makes money. They can then take the fees they get in to go and hedge their bets or do whatever they want to do, but their business model focuses on their getting results.

 

[dismal]

Perhaps you joke but the question should be why this does not happen. My back of the envelope math suggests they are paying ~2% fees to people managing public instruments.

There are certainly people willing to do it for a lot less.

This plus the underperformance in the private funds suggests the main takeaway here is that the NYC pension fund employs some pretty crappy managers.

It would seem that they'd be able to shop around. While there are some fixed costs to having a company which manages investments, I can't see why there's be too much of a difference in those costs if they're managing $100 million in funds or managing $1 billion in funds. I'd figure that a business model of "We will charge you $X per month and Y% of your profits in order to manage your money". If the fund doesn't make a profit, the investment company doesn't make a profit and if the fund makes money then the investment company makes money. They can then take the fees they get in to go and hedge their bets or do whatever they want to do, but their business model focuses on their getting results.

I'm not entirely familiar with the way public securities funds work, but what you describe isn't far off the way the private equity market works - except it's x% of your commitment per year + y% of the profits above some preferred return.

Now, the pension fund managers will also diversify across several funds. So, if they have $120 billion to commit to public strategies they may commit in chunks of $200-500 million to multiple funds. Now across all these funds a couple of things might happen: 1) the overall return starts to blend towards the market return (as I said earlier, it's hard to invest a lot of money in the market and not start to look like the market.) 2) In spite of the overall return looking like the market, the portfolio is comprised of individual funds that are winners and losers -- and the winners are getting that y% of profits. This y% of profits on the winners drives the total fees paid up well above what it would be if you just plunked it all in Vanguard index fund or even replicated the index in house.

 

[Nice Squirrel]

To finish up the derail, was on the phone for 50 minutes and talked to three different reps. Voiced my frustration on having to call and be on hold every year to revamp my service. Let them know the exact deal US Internet is offering (higher speed - less money) and that I probably won't be continuing on with their service because as a customer I don't feel as though I should be playing such games -- for a lower quality product.

My favorite part of the conversation was:

"We can get you 40 Mbps for $39.99"
"I don't need 40Mbps, my 20Mbs speed is more than I have ever needed"
"But it's a better deal."
"No, I'm paying for bandwidth I do not use. Plus I have the privilege of calling in and being on hold every year after the price is jacked up."
"You'd be getting faster service. It's the best deal you are going to find."
"US Internet is offering 50Mbps at the same price. I can direct you to their webpage."

 

[Alcoholic Actuary]

Scott Evans, the comptroller’s chief investment officer, had to work backward from the footnotes in the reports to estimate just how much had been paid each year to a long list of Wall Street firms that managed investments in the public markets. He then calculated that those fees, combined with the significant underperformance of the investments in private assets like real estate, amount to a whopping negative — a drag of more than $2.5 billion — since the end of 2004.

http://www.nytimes.com/2015/04/09/n...w-york-city-pension-gains.html?referrer=&_r=1

When will these cities and states wise up and realize that there is no gain to be had with actively managed funds? Hire a few actuaries, a few finance people, tell them to invest only in passive index funds and find the appropriate percent allocation of stocks (both domestic and global), bonds (combination of government bonds, domestic and global, and corporate), and any other asset class that is considered to enhance the risk adjusted performance of the portfolio.

The city does hire a few actuaries. Here is a link to the pension site, from which you can get to the 'Silver Books' that contain all of the actuarial assumptions and methods:

http://www.nyc.gov/html/actuary/html/pension/pension.shtml

The management fees are exorbitant and I think your idea has merit. I'd just like to illuminate one potential obstacle - which is that there are regulatory restrictions on the type and grade of possible investments in which public sector pension plans are allowed to be invested (within certain percentages). From the NYCERS Silver Book 2012 (the latest edition) it appears that the assumed investment rate of return was moved from 8% gross of fees to 7% net of fees. From the CAFR (which is also available from the link above) they were able to earn 12.2% in 2013 and are at a 7.5% 10 year average.

I'm not sure if you can do that with an index fund and still meet the investment restrictions, but again I'm sure someone could do it more cheaply.

aa

 

[SimpleDon]

I read recently that Wall Street's prices for delivering its services are about twice what they were in 1912, during the time of JP Morgan. That in spite of all of the technical advancements that have improved productivity in virtually every other industry in the US economy, the financial sector is much less productive than it was in 1912, because it collects twice as much of the nation's income for its services as they did in 1912.

I will try to find the article.