For example, staff of the $312.2 billion California State Teachers’ Retirement System, West Sacramento, is researching a public-private crossover strategy to invest in global equities and private equity in a single portfolio. CalSTRS’ general investment consultant, Meketa Investment Group, is currently in the midst of a benchmarking study to help eliminate the potential for increased tracking error resulting from this single fund approach.
CalSTRS’ collaborative model is an investment strategy to reduce costs, control risk and boost returns with strategies such as managing more assets in-house, co-investing and, in real estate, acquiring minority or majority interests in money managers.
Mr. Chan said that the collaborative model “is working.” According to the collaborative model savings report released Thursday, CalSTRS saved a total of $781 million for the four years ended 2020, including $309 million in cost savings in 2020 alone. Co-investments in the four-year period saved the plan about $100 million in carried interest paid in collaborative model structures that have lower carried interest fees than funds. About 20% of CalSTRS’ private equity portfolio is in no fee/no carried interest co-investments. Private equity made up 13.3% of CalSTRS’ total assets as of Sept. 30.
The collaborative model also added 12 basis points in CalSTRS overall returns in 2020.
Even so, how to reduce alternative investment costs including fees such as portfolio company fees over which investors have no control, is a complex question, said CIO Christopher Ailman during the meeting.
“The two and 20 model (2% management fees and 20% carried interest) is broken for size … smaller investors are still having to pay that,” Mr. Ailman said.
And whenever alternative investment managers develop a new product, they tend to revert to the 2% and 20% cost model, he said.
There has been change in some alternative investment asset classes, he added.
Even the most popular hedge funds are starting to break free from the 2 and 20 model and infrastructure fees have fallen to around 1% management fee and a 15% carried interest from 2% and 20%, Mr. Ailman said. However, venture capital “is going the other way,” increasing fees to 3% management fees and 30% or 35% in carried interest, he added.
“Size matters and helps,” he said. “The ability to be nimble, quick and be a good partner, but a respected partner, is absolutely critical.”