CalPERS urged to ban consultants-turned-money managers

The California Public Employees’ Retirement System, the largest public pension in the US, will consider banning investment consultants from working with the pension if they serve as money managers for the pension's investments as well.

The call to ban consultants-cum-money managers was one of numerous recommendations CalPERS reviewed Monday from law firm Steptoe & Johnson after a “special review” launched last year of placement fees paid by CalPERS’ investment managers.

“I have … directed staff to bring back an implementation plan that the board can discuss as soon as possible,” said Rob Feckner, president of the CalPERS board, in a statement.

I have … directed staff to bring back an implementation plan that the board can discuss as soon as possible. Rob Feckner, president of the CalPERS board

Earlier this year, CalPERS, which has about $220 billion in assets, ended its long relationship with Pacific Corporate Group, which provided both investment advisory services and also ran funds into which CalPERS committed capital. The recommendation reviewed Monday would prohibit the pension from entering that type of relationship again.

Steptoe also recommended the pension “insist that nearly all fees it pays to external managers be incentive fees based on successfully investing CalPERS' assets and not in management or other fees”. Also, fees should be documented in a “transparent and straightforward” manner.

CalPERS has already implemented some of the recommendations presented by Steptoe, including creating a risk management office and the position of chief risk officer; banning gifts to pension employees; creating an ethics hotline and establishing rules for communications between board members and staff members about investment proposals.

However, other recommendations went far in regulating the relationship between the pension and its external managers. For example, Steptoe recommended prohibiting “direct or indirect” payment of placement agent fees from the assets of partnerships or other funds in which the pension invests; encouraging external managers to hold investment meetings at the offices of LPs or GPs and not in “expensive settings”; and mandating that outside advisors serve only one of two functions – either helping the pension select investments, or helping CalPERS monitor those investments, but not both.

The pension has been cracking down on fees since last year, when it was revealed a former CalPERS board member, Alfred Villalobos, had been paid millions to help solicit CalPERS' money for Apollo Global Management, even though the pension owns a stake in Apollo.

Villalobos has been sued by California for alleged fraud. Since CalPERS started its review of fees last year, the pension has obtained more than $200 million in “fee concessions” from investment managers, and about $100 million in fee reductions from other “large external money managers”, who have pledged not to use placement agents when seeking CalPERS’ business.