CTPF Trustee Finally Asks Private Equity Fund - How Much do you Charge?
I did a double take listening to the latest Chicago Teachers Pension Fund (CTPF) Board of Trustees Meeting when Investment Chair and Fund VP Jacquelyne Price Ward asked a private equity group a seldom-asked question - What are your fees?
One and ten, they responded.
That means they charge one percent in management fees and ten percent of carrying interest, which means they get ten percent of the profits. It is called carrying interest instead of profits because these money managers were able to convince the IRS to not tax their gains (also called a performance fee).
“That’s half of what the other funds charge,” Retired Teacher Trustee Mary Sharon Reilly said at the December 14, 2023 meeting.
They say the standard fee is 2 and 20 (2 percent management fee and 20 percent profits), which means the fund usually pays other managers the added fees.
Farol Asset Management made a presentation before the vote by stating that they are a certified minority manager supplier and they have invested 80 percent of the money CTPF allocated to them.
The Chicago Teachers’ Pension Fund (CTPF) Board of Trustees voted 6-2 to approve the $10 million investment with Farol Asset Management Fund III.
CORE Trustees Jeffery Blackwell, Jacquelyne Price Ward, Mary Sharon Reilly, Tammie Vinson and Quentin Washington, and Members First Victor Ochoa voted yes.
The two no votes were recently elected CORE Teacher Trustee Paula Barrajas and Independent Retired Teacher Trustee Maria J. Rodriguez.
Retired Trustee Lois Nelson, CPS Board Trustee Tanya Woods and Principal Trustee Jerry Travlos were not present at the December Board Meeting.
CTPF Investment Consultant Callan then made a presentation about the economy and noted the Chicago Teachers Pension Fund ranks highly amongst its peers.
“Another question in terms of private equity,” Trustee Mary Sharon Reilly said during the Callan presentation. “It seems there’s a lot of noise out there that we shouldn’t be there. It’s not a good place. How do we justify it?”
It appears the Chicago Teachers Pension Fund is starting to feel the heat about investing in an industry that many say is destroying this country. Two books were published this year that exposed the corrupt industry that they say bankrupts companies so they can fire workers and slash pension and health care costs, while charging high fees that are hidden.
The CTPF has over 100 money managers, and 29 are private equity.
The Callan rep said private equity has earned 3 percent over the public markets net of fees (including fees).
“So you’ve had a very successful program,” the Callan rep said. “Ten years ago you started to use some direct managers to reduce some of those layers of fees, and since then the public market equivalent has actually increased, so you’ve been very good with your fund selection. You have to choose the top-tiered funds, or there is a chance you will underperform.”
Many public pension funds rely heavily on the expertise of pension consultants like Callan to help manage its assets since the Trustees are made up of workers like teachers or cops who lack investment expertise.
“Today, many consultants derive far greater revenue from conflicted revenue streams than from providing objective advice on a non-discretionary basis,” wrote Ted Siedle, a whistleblower and former Securities and Exchange Commission (SEC) lawyer who conducts forensic audits of public pension funds.
Erika Meza, a Washington High School teacher who heads the Chicago Teachers Union Tier 2 Pension Committee, made a public statement before the beginning of the December Board of Trustees meeting. She ran in the last Teacher Pension Trustee Election.
“I want to congratulate the two pension trustees (Paula Barrajas and Tammie Vinson) who won who I ran against, and your commitment to the cause,” Meza said. “The concern is our pension fund and no secret it is only 47 percent funded. And this poses a significant challenge.”
Meza said pension experts agree that the best plan to fix this is “effective and efficient money management.”
“While I’m not implying mismanagement is in our fund, I believe in being proactive rather than reactive,” she said. “One avenue we should explore is investing our members' hard earned pensions in institutional index funds. This shift away from active investing with private equity firms who often charge exorbitant fees, can help and protect and maximize our members' investments. Research consistently shows that these private equity firms seldomly beat the market consistently, and those fees eat into our gains.
“Active funds and private equity strategies promise returns better than index funds which track the market, these products are much more expensive than index funds which can cost close to zero. Yet these funds drain our wealth without providing clear benefits over these low-cost diversified index funds. Decades of peer reviewed research has consistently shown that beating the markets is a losing investment strategy over the long run.”
She pointed to public pension funds in Pennsylvania, North Carolina and Nevada who have successfully transitioned to index funds. She urged the trustees to consider switching to index funds.
“Thank you, we appreciate your concerns,” President Jeffery Blackwell said after her speech via zoom.
The last major investment business was the trustees vote on the Manager Watchlist.
The following money managers are on the Watchlist for either performance reasons and/or personnel turnover:
Lazard (placed 3/2021), $481 million (Assets Under Management - AUM), 0.4 rating;
Ariel (7/2020), $69 million, 0.9 rating:
State Street Global Advisors (4/2022), $385 million, N/A score;
Leading Edge International Equity, performance reasons, (4/2022), $127 million, 0.6 rating - (recommend to remove);
Strategic Global Advisors Intl Equity - performance reasons, (3/2021), $75 million, 0.6 score;
Attucks, performance reasons/personnel turnover, March 2023, $238 million AUM, N/A;
William Blair, performance reasons, (3/2023), $191 million AUM, 0.7 score;
JP Morgan SPF Fund, Dec. 2023, $179 million, N/A
Teacher Trustee Tammie Vinson asked why Ariel is still on the Watchlist from three years ago and what do they need to do to get off.
Callan stated that their previous fund manager was more conservative in investing so their returns were less than the market. That fund manager has since left and they have a new portfolio manager who has no history.
Vinson asked how long does Callan monitor the performance of funds like Ariel on the Watchlist.
Callan said 3 to 5 years.
Ariel has been off and on the Watchlist going back at least 30 years, while Lazard has been on and off the list going back at least 20 years.
The fact is, almost all of these expensive money managers will not beat the S&P market over the long run.
"We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest," said billionaire investor Warren Buffett, according to P&I. "If I were running a pension fund, I would be very careful about what was being offered to me."
Buffet is a huge fan of low-cost index funds.
Another question to ponder about private equity and the teachers pension fund. Public pension funds are supposed to be fully transparent by law, while private equity wants to be secretive.