Tuesday, July 30, 2013

Retreat from Indexing or How to Make Wall Street Rich

In March, 2000 the NYCERS pension fund was worth $44.4B. Half of that, $22.3B (50+% of assets), was invested in US equity Russell-3000 index strategy run by two firms, Merrill Lynch and Barclay Global. Prior to 2000 there had been only one manager, Bankers Trust/Deutsche Bank fund. It cost NYCERS $438,000 in fees to run $22.3B. As early as 1980 NYCERS had been a pioneer in using indexing for its US equity assets. In particular, the Russell-3000 index strategy is profitable, comprehensive, and low cost. Perfect for a mature pension fund like NYCERS.

As of March, 2013 the NYCERS pension fund was worth $46.3B. But the Russell 3000 index fund has been cut and a lot redundant index funds have been added. The total US equity index assets is now $14.3B but with annual fees equal to $2.3M. You can see the details: below:

  • Russell 3000 $6.325B, 20102 annual fees equal to $456,000
  • S&P 500 ---- $3.978B, 20102 annual fees equal to $103,000
  • S&P 500 ---- $0.340B, 20102 annual fees equal to $327,000
  • Russell 2000 $0.198B, 20102 annual fees equal to $ 39,000
  • S&P 400 ---- $2.462B, 20102 annual fees equal to $ 82,000
  • Russell 1000 $1.033B, 20102 annual fees equal to $1,294,000

It's like like the trustees have lost their way. All of the added indexes are subsets of the Russell-3000. There is no value gained by this proliferation of funds. Only the managers are gaining with added fees. This fall off in the index strategy, however, is the root cause of the explosion in management fees. The trustees cut this strategy to free up assets for other less valuable strategies, like private equity.

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