Keep it simple: Don’t pay through the nose on fees and avoid unnecessary risks with our retirement money.
That’s an axiom that critics say is lacking in the investment policies of New York state’s $150 billion Common Retirement Fund — New York’s largest, insuring income for retired cops, firemen and sanitation workers, among other unions.
New York, in dire need of landing better pension-fund returns, uses private-equity funds as part of the state retirement fund in order to chase unrealistic results mandated by state legislators.
Comptroller Thomas DiNapoli is under pressure to produce healthy returns for current and future retirees. The state fund, like many other public retirement funds, has an assumed rate of return of 7.5 percent, which many pension-industry observers think is too optimistic.
Last year the fund fell well below the mark, returning only 5.96 percent, but the private equity part of the fund obtained 8.3 percent.
Yet the PE return is diminished by performance and management fees, which can dramatically change returns.
Martijn Cremers, a Notre Dame finance professor who studied the performance of private-equity funds over the past two decades, warns private equity can be dangerous.
Cremers writes that private-equity, while used by many states, are not appropriate investments.
A recent investment report from DiNapoli explains, “Private-equity investing is unlike most other forms of investing. Unlike lending or making investments in the total stock of companies, equity combine[s] both the provision of capital and expertise.”
The “volatile” nature of these funds, DiNapoli concedes, means an investment can go up or down more quickly than many other types of investments.
DiNapoli argues that private equity provides a healthy investment mix for the state pension fund.
“The Common Retirement Fund is a proponent of asset class diversification,” DiNapoli said through a spokesman. Indeed, the spokesman said, the comptroller has an obligation to “examine every investment anew.”
DiNapoli, during his term, has doubled the private equity stake in the state common retirement fund, to 9.6 percent.
The mean cost of private equity funds is 252.41 basis points, or roughly 2.5 percent, Cremers notes in his 20-year study. An average index fund can be as little as 0.1 percent because it trades very little.
“My simple conclusion,” Cremers writes, “is that pension funds on average would have similar returns — but with less risk — if they would simply have invested in passive equity indices.”
Still, DiNapoli’s spokesman said the comptroller is satisfied with private-equity funds’ “net” of fees.
“Private equity,” said the spokesman, “has performed well as an equity class.”