Now that I have your attention, let me bore you with the numbers.
In FY-2018, the NYCERS portfolio opened at $61.3B and closed at $65.2B. With interest and dividends, NYCERS had a rate of return of 8.56%. For that return NYCERS spent $241.8B on investment expenses. That was almost a quarter of a billion dollars and represents 39.5 basis points based on the opening balance. At the same time Jane Doe earned 14.34% on her standard S&P 500 index fund for basically no cost.
NYCERS is well aware of the low cost/high return index strategy. During FY-2018, the system consolidated its five existing stock index funds (four large cap and one mid cap) into one fund.
The new fund, Blackrock Russell-1000 Core Index had a closing value of $14.828B on June 30, 2018. The fee for the last quarter of the year was $83,775. (NYCERS FY-2018 CAFR page 144). The Comptroller quoted a 3 month rate of return of 3.84%. The five retired funds cost $424,000 for the first nine months of FY-2018.
Projected for a whole year, NYCERS would have earned 15.36% on $14B for a cost of only $347,100.
Costs for the Five City Funds
On a larger scale what is even more shocking is that the five NYC pension funds spent $999.4M on investment expenses. That's right, just shy of one billion dollars in one year. The opening balance for the five funds was $201.0B and closed with $217.0B. That is 50 basis points based on the opening balance.
There is never any quantitative justification for this level of cost.
It is my opinion, however, that large pension systems as a general rule should be able expense their investment operations for 10 basis points or less. To support this opinion consider the following disussion.
NYCERS Details
The following table is a listing of NYCERS fees by asset class and style as reported by the FY-2018 NYCERS CAFR starting on page 144. It is an eye opening read.
In the table three items are highlighted. They represent limited partnership contracts (approx. 200) that the Comptroller has signed and the trustees have never seen. Their EOY asset values and rates of return are highly questionable in so far as the numbers are provided by the general partner and can not be publicly confirmed. I would use a 20% discount rate on these three asset classes. They are the highest cost asset classes and i would also be skeptical of their expense numbers.
On an ethical basis the limited partnerships very often and in a hidden manner engage in actions designed to extract the greatest amount of money with greatest damage to society.
In addition, these contracts can not be terminated. The general partner is in total control of the term of the contract and the demand for new funds from the limited partners during the life of the contract.
One bright spot is that NYCERS has reduced its exposure to the hedge fund class.
See the last column in the table for what I think is the proper diversification of the NYCERS portfolio after discarding the risky high cost asset classes. It looks like you would be able to get away with a $30M cost for the year.
What would the return for this portfolio? The current NYCERS asset allocation is 67% stocks and 33% bonds. Bonds did terrible in FY-2018. Structured and high yield returned -.03% but the R-1000 core index fund returned 15.36%. So you wind up with a total 10.27% total return for the year. Not bad for a $30.0M cost
By the way what did NYCERS get for the $2.1M under miscellaneous expenses? I've given up trying to find out what organization ("Org") costs are.
| Asset Class | Fees | EOY Asset Value | Basis Points | Rate of Return | Proper Allocation |
| Fixed Income | |||||
| Structured | $5,318,152 | $14,057M | 3.3 | -0.34% | $22.0B |
| High Yield | $7,391,750 | $2,602M | 28.4 | 1.65% | 4.0B |
| All Other | $6,096,651 | $1,257M | 48.5 | $0.0B | |
| US Equity | |||||
| Passive | $476,096 | $14,359M | 0.3 | 15.3% | $37.0B |
| Active | $7,053,690 | $3,102M | 22.7 | 13.34% | $0.0B |
| US SC Equity Passive fees: | $15,649 | $334M | 0.5 | 20.83% | $0.5B |
| Private Equity | $50,117,502 | $4,470M | 141.2 | 17.8% | $0.0B |
| (plus Org costs) | $13,064,536 | ||||
| PE-Opport.& Global FI | $15,534,877 | $1,851M | 93.5 | 7.0% | $0.0B |
| (plus Org costs) | $1,820,851) | ||||
| Real Estate & Infrastructure | $40,993,082 | $3,792M | 133.2 | 12.19% | $0.0B |
| (plus Org costs) | $9,510,109 | ||||
| Foreign Equity | $41,508,658 | $8,226M | 82.7 | 11.4% | $0.0B |
| (plus Taxes =) | $26,456,516 | ||||
| Hedge Fund | $345,733 | $68.0M | 50.843 | 8.43% | $0.0B |
| Target-Mortgage | $1,515,348 | $819M | 18.5 | -0.69% | $1.0B |
| TIPS | $496,907 | $2,585M | 2.0 | 2.18% | $2.0B |
| Bank Loan | $3,661,246 | $1,139M | 32.2 | 4.73% | $0.0B |
| Consultant Fees: | $3,769,671 | ||||
| Legal Fees: | $405,499 | ||||
| Subsidy to Comptroller: | $4,203,498 | ||||
| Misc. Expenses: | $2,061,778 | ||||
| Total | $241.8M |
NYCERS Income Flow during FY-2018
Note: During FY-2018 NYCERS received:
- $ 523.5M - contributions from members
- $ 3,377.0M - contributions from employers
- $ 878.6M - interest income
- $ 897.9M - dividend income
- $ 27.1M - securities lending income
- $ 3.4M - other income
During FY-2018 NYCERS paid out:
- $ 4,882.6M - benefits and withdrawals
- $ 9.1M - transfers to other retirement systems
- $ 10.9M - payments to VSF (Transit&Housing Police)
- $ 205.0M - payments to VSF - Correction Force
- $ 241.8M - investment expenses
- $ 59.7M - NYCERS operating expenses
