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Risk-Free Returns for Everybody!

Over the past few months, I’ve been trying better understand the (insane) universe of investment-related costs and fees that asset managers and banks charge institutional investors. I’ve seen things that would make a loan shark squeamish…

I’ve said this before, but I think it bears repeating: Investment professionals too often forget that a dollar saved in costs or fees is actually worth more than a dollar earned from investment returns (thanks to taxes). In addition, investing in cost and fee reduction can provide far greater returns per unit of risk than anything else an investment organization can do. In fact, there’s an argument to be made that cost and fee savings represent risk-free returns to investors.

It’s for these reasons that I’ve been working hard to better understand the (insane) universe of investment related costs and fees. And it’s why I’ve been pushing the community of Giants to take costs and fees more seriously. Because the sad reality is that fees and expenses tend to be overlooked by these investors, and it’s fairly easy to figure out why.

The opaque nature of financial products makes it easy for wily financiers to bury costs and fees. Moreover, mounting a credible offensive against fees and costs is time consuming and requires in-depth knowledge of how Wall Street actually makes its money. Compared to the risk and asset management priorities of investment staff, "cost management" tends to be an afterthought. And this seems to be true for most institutional investors...

But not for CalPERS apparently!

Last night, I was reading CalPERS’ new Investment Beliefs and was pleasantly surprised to see the following belief among the 10 that have now been formally approved by the Board:

"Costs matter and need to be effectively managed".

A-Men. And here are the sub-principles that go along with that headline:

"CalPERS will balance risk, return and cost when choosing and evaluating investment managers and investment strategies.

• Transparency of the total costs to manage the CalPERS portfolio is required of CalPERS business partners and itself.

• Performance fee arrangements and incentive compensation plans should align the interests of the fund, staff and external managers.

• CalPERS will seek to capture a larger share of economic returns by using our size to maximize our negotiating leverage. We will also seek to reduce cost, risk and complexity related to manager selection and oversight.

• When deciding how to implement an investment strategy, CalPERS will implement in the most cost effective manner.

I'm really pleased to see that this often overlooked aspect of institutional investment occupies such an important position among the fund's competing priorities. Huge props to CalPERS on this!

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