COMMONWEALTH OF PENNSYLVANIA
PUBLIC SCHOOL EMPLOYEES’ RETIREMENT SYSTEM
Investment Expenses Report
FY 2016
December 6, 2016
Thomas Bauer, John Kemp, Charles Spiller
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why Use External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
1
2
Challenge: No uniform disclosure reporting or evaluation convention exists for
Public Funds
Unable to compare one fund to another fund
No guidance from GASB, GIPS, GFOA, etc.
Some organizations claim to analyze fee terms but do not take sufficient
details into account to make meaningful comparisons
Example: Ranking all Non-U.S. Equity mandates without regard to their
performance, size of mandate, or volatility will not provide actionable
insights
Reporting
3
Given lack of reporting and disclosure standards, public pensions funds can and do
report and disclose differently
Example
Assume:
Fund of funds manager charges 1% fee
Underlying fund managers charge 2% base fee and 20% profit share
Pension 1 and Pension 2 invest in the fund of funds manager
Pension 3 and Pension 4 do not invest in the fund of funds manager but
instead directly invest in the underlying fund managers
Reporting and disclosure:
Perception: Pension 2 > Pension 3 > Pension 4 > Pension 1
Reality: Pension 1 = Pension 2 > Pension 3 = Pension 4
Reporting
Pension 1 Pension 2 Pension 3 Pension 4
1%
1% plus
2% and 20% 2% and 20% 2%
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
4
5
PSERS defines Total Investment Expenses as:
External Manager Expenses
Public Markets
o Base Fees
o Profit Share
Private Markets (i.e., Limited Partnership structures)
o Base Fees
+ Internal Management Expenses
Compensation and Benefits
Technology Services
Miscellaneous Service Providers
+ Other Expenses
Consultants (e.g., Aon Hewitt, Portfolio Advisors, Courtland, Aksia)
Legal
Overhead
Total Investment Expenses
6
Total Investment Expenses
Amounts in millions of dollars
$314
$399
$478
$522 $515
$481
$558
$482
$455
$416
$0
$100
$200
$300
$400
$500
$600
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Total Investment Expenses
7
Total Investment Expenses
Calculated based upon quarterly net NAV, i.e., excludes leverage and undrawn commitments
0.52%
0.60%
0.96%
1.15%
1.07%
0.98%
1.13%
0.97%
0.87% 0.86%
0.00%
0.25%
0.50%
0.75%
1.00%
1.25%
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Total Investment Expenses as a % of the Total Fund (Net NAV)
8
Total Investment Expenses
Calculated based upon quarterly gross exposure, i.e., NAV plus leverage and undrawn commitments
0.41%
0.47%
0.70%
0.82% 0.83% 0.80%
0.95%
0.83%
0.75%
0.68%
0.00%
0.25%
0.50%
0.75%
1.00%
1.25%
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Total Investment Expenses as a % of the Total Fund (Gross Exposure)
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why Use External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
9
10
External vs Internal vs Other
Amounts in millions of dollars
$305
$387
$465
$510 $500
$467
$538
$463
$432
$396
$6 $8 $9 $8 $10 $10 $15 $12 $9 $10 $3 $4 $4 $4 $5 $4 $5 $7 $14 $10
$-
$100
$200
$300
$400
$500
$600
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
External Internal Other
11
External vs Internal vs Other
Calculated based upon quarterly net NAV, i.e., excludes leverage and undrawn commitments
0.50%
0.58%
0.93%
1.13%
1.04%
0.96%
1.09%
0.93%
0.83% 0.82%
0.01% 0.01% 0.02% 0.02% 0.02% 0.02% 0.03% 0.02% 0.02% 0.02% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.03%
0.02%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
External vs Internal vs Other as a % of the Total Fund (Net NAV)
External Internal Other
12
External vs Internal vs Other
Calculated based upon quarterly gross exposure, i.e., NAV plus leverage and undrawn commitments
0.40%
0.46%
0.68%
0.80% 0.80% 0.77%
0.92%
0.80%
0.71%
0.64%
0.01% 0.01% 0.01% 0.01% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.02% 0.02%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
External vs Internal vs Other as a % of the Total Fund (Gross Exposure)
External Internal Other
13
External vs Internal vs Other
Amounts in billions of dollars
Calculated based upon gross exposure, i.e., NAV plus leverage
45 45
30 32
35 36
40 41 40
37
22
17
13 14
16
13 13
17 17
19
-
5
10
15
20
25
30
35
40
45
50
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
External AUM v Internal AUM (Gross Exposure)
External Internal
14
External vs Internal vs Other
Calculated based upon gross exposure, i.e., NAV plus leverage
67%
73% 70% 70%
68%
73% 76%
70% 70%
65%
33%
27% 30% 30%
32%
27% 24%
30% 30%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
External AUM v Internal AUM as a % of the Total Fund (Gross Exposure)
External Internal
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why Use External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
15
16
IF
Gross Return 10%
Base Fee 1%
Hurdle Rate 6%
Profit Share 20%
THEN
Profit Share = (10% - 1% - 6%) * 20% = 0.6%
Return To Manager
Base Fee 1%
Profit Share 0.6%
Total 1.6%
Return To PSERS
Gross Return less Manager Share 8.4%
Stylized Example
17
Gross Return less Hurdle Rate 4%
Total Investment Expense 1.6% (Goes to Manager)
Alpha 2.4% (Goes to PSERS)
Stylized Example
18
IF
Gross Return 12%
Base Fee 1%
Hurdle Rate 6%
Profit Share 20%
THEN
Profit Share = (10% - 1% - 6%) * 20% = 1%
Return To Manager
Base Fee 1%
Profit Share 1%
Total 2%
Return To PSERS
Gross Return less Manager Share 10%
Stylized Example
19
Gross Return less Hurdle Rate 6%
Total Investment Expense 2% (Goes to Manager)
Alpha 4% (Goes to PSERS)
Better manager earns higher fee
PSERS earns higher alpha
Win-win
Stylized Example
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why Use External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
20
21
Total Investment Expenses vs Alpha
Dollar amounts in millions
“e” represents estimate
Cumulative Total Over 10 years
Total Alpha $5,538
Total Investment Expenses $4,620
$314 $399 $478 $522 $515 $481 $558 $482 $455 $416
$2,360
-$618
-$3,131
$1,754 $1,582
$856
$1,189
$1,444
$440
-$339
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012e FY 2013e FY 2014e FY 2015e FY 2016e
Total Investment Expenses Alpha
22
Total Investment Expenses vs Alpha
Alpha calculation is based upon actual performance
“e” represents estimate
Weighted Average Over 10 Years
Alpha 1.07%
Total Investment Expenses 0.89%
0.41% 0.47% 0.70% 0.82% 0.83% 0.80% 0.95% 0.83% 0.75% 0.68%
3.38%
-0.82%
-5.40%
3.13% 2.77%
1.57%
2.04% 2.32%
0.69%
-0.56%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012e FY 2013e FY 2014e FY 2015e FY 2016e
Total Investment Expenses as a % of the Total Fund Alpha as a % of the Total Fund
23
Internal Alpha vs Allocation/External Alpha
Cumulative Total Over 10 Years
Allocation/External Alpha $4,836
Internal Alpha $702
$2,354
-$671
-$3,271
$1,561 $1,526
$806
$1,181 $1,416
$395
-$460
$6 $54 $140 $193 $56 $51 $8 $28 $45 $121
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Allocation /External Alpha Internal Alpha
Dollar amounts in millions
24
Alpha “Ecosystem”
Internal Staff Internal Alpha
External Managers External Alpha
Internal Staff interactions Internal Alpha
with External Managers
(at portfolio level and overall Fund level)
Internal Alpha vs Allocation/External Alpha
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why Use External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
25
26
Asset Class Summary
Amounts in millions of dollars
INVESTMENT EXPENSES BY ASSET CLASS FY 2013 FY 2014 FY 2015 FY 2016
External Management
U.S. Equities $ 2 $ 3 $ 3 $ 3
Non-U.S. Equities $ 28 $ 18 $ 24 $ 24
Master Limited Partnerships $ 5 $ 11 $ 12 $ 8
Fixed Income $ 118 $ 82 $ 84 $ 82
Commodities $ 17 $ 11 $ 8 $ 6
Real Estate $ 75 $ 74 $ 69 $ 52
Private Equity $ 137 $ 117 $ 102 $ 99
Absolute Return $ 150 $ 141 $ 117 $ 102
Risk Parity $ 5 $ 6 $ 13 $ 18
External Management Total $ 538 $ 463 $ 432 $ 396
Internal Management $ 15 $ 12 $ 9 $ 10
Other $ 5 $ 7 $ 14 $ 10
Total Investment Expenses $ 558 $ 482 $ 455 $ 416
27
Asset Class Summary
Amounts in millions of dollars
INVESTMENT EXPENSES BY ASSET CLASS
BASE FEES PROFIT SHARE External Management FY 2014 FY 2015 FY 2016 FY 2014 FY 2015 FY 2016
U.S. Equities $ 3 $ 2 $ 1 $ - $ 0.6 $ 2
Non-U.S. Equities $ 18 $ 18 $ 18 $ 0.2 $ 6 $ 6
Master Limited Partnerships $ 7 $ 9 $ 7 $ 4 $ 3 $ 1
Fixed Income $ 72 $ 77 $ 78 $ 10 $ 8 $ 4
Commodities $ 11 $ 8 $ 6 $ - $ 0.3 $ -
Real Estate $ 74 $ 69 $ 52 $ - $ - $ -
Private Equity $ 117 $ 102 $ 99 $ - $ - $ -
Absolute Return $ 86 $ 83 $ 78 $ 54 $ 34 $ 25
Risk Parity $ 6 $ 13 $ 18 $ - $ - $ -
External Management Total $ 395 $ 380 $ 358 $ 68 $ 52 $ 38
Internal Management $ 12 $ 9 $ 10 $ - $ - $ -
Other $ 7 $ 14 $ 10 $ - $ - $ -
Total Investment Expenses $ 414 $ 403 $ 378 $ 68 $ 52 $ 38
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why Use External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
28
29
Why use External Managers?
Is the Asset Class Efficient?
Internal Passive Management
Internal Staff has Skill?
Internal Active Management
External Manager has Skill?
External Active Management
Features
Very Low Expenses
Low or Zero Alpha
Very Low Expenses
Attractive Alpha
Higher Expenses
Attractive Alpha
Examples
US Public Equity
Gold
US Core Fixed Income
LIBOR Plus Fund
Private Equity
Absolute Return
Yes Yes Yes
No No
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why Use External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
30
31
Add staff to bolster and backstop internal management
For external managers in Traditional Investments
Reduce the base fee and create better alignment of interests by moving to a
lower base fee coupled with a profit share
Enter into arrangements for netting of profit shares for managers with multiple
PSERS mandates
For external managers in Non-Traditional Investments
Continue to grow co-investments (lower fee and profit share)
Move away from paying on commitment and towards paying on invested
capital
Continue to push managers to adopt ILPA template
CAVEAT: Ability to negotiate fees downward depends upon supply and demand of
a manager’s services:
High demand and/or low supply gives PSERS limited negotiating leverage
FY 2017 Investment Expense Initiatives
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why Use External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
32
33
Total Investment Expenses in dollars will be
Higher if
PSERS AUM is larger
Market returns are higher
More external managers
Lower if
PSERS AUM is smaller
Market returns are lower
More internal management
Total Alpha in dollars will be
Higher if use a mix of external and internal managers
Lower if use only internal management
Key Takeaways
Table of Contents
Reporting
Total Investment Expenses vs Alpha
Total Investment Expenses
External vs Internal vs Other
Stylized Example
Asset Class Summary
Why Use External Managers?
FY 2017 Investment Expense Initiatives
Key Takeaways
Appendix
– Breakdown of Internal and Other Expenses
– Asset Class Breakdown
34
35
Breakdown of Internal and Other Expenses
FY 2016
OTHER EXPENSES INTERNAL MANAGEMENT EXPENSES Investment Consultants Staff Compensation (salary and benefits) $6,719,000
Aksia, LLC $700,000
Courtland Partners LTD $278,750 Specialized Service Providers
CP Cogent Securities LP $2,914,331 BlackRock Solutions (Risk) $605,459
Financial Control Systems (ABOR) $643,256 CBIZ Benefits & Insurance $108,821
Glass Lewis & Co. LLC $174,315 Cornerstone Macro $43,958
Hewitt EnnisKnupp Inc $805,230 Misc Service Providers $103,732
Portfolio Advisors $2,037,542
Misc Consultants $58,009 Overhead $1,029,303
Misc. Legal Service Providers $336,567 Miscellaneous Expenses $1,059,000
BNY Mellon (Custody) $2,331,012
TOTAL OTHER EXPENSES $10,279,012 TOTAL INTERNAL MANAGEMENT EXPENSES $9,669,273
36
U.S. Equity Investment Manager Fees FY 2016 ($ in Thousands)
5 U.S. Equity portfolios in FY 2016 (2 external, 3 internal)
Total fees in dollars increased 20% over the past year
All externally managed U.S. Equity portfolios have been
terminated, with the exception of external management
used for internal portfolio derivative overlays
Internal asset management decreases fees as a percentage of
assets
*Average Month-end NAV used to calculate Alpha $
Fees as a % of Assets
(External Managers)
Fees as a % of Assets
(with PSERS Internal)
U.S. Large Cap 0.93% 0.11%
U.S. Mid/Small Cap N/A N/A
Total 0.93% 0.08%
U.S. Equity Total
# of Portfolios 5
Average NAV* $3,767,947
Performance
(Net of Fees, unhedged) 3.79%
Benchmark
(unhedged) 2.25%
Alpha $
(Net of Fees)* $18,445
Total Fees $3,198
Base Fees $1,461
Profit Share $1,736
Total Fees as a % of
NAV 0.08%
37
Non-U.S. Equity Investment Manager Fees FY 2016 ($ in Thousands)
Base fees, as a percentage of NAV, decreased by 2 basis points to
0.27%
Total fees in dollars increased 2% over the past year
Base fees paid increased by 2%, while average AUM
increased by 8%
Due to external manager outperformance the program
incurred profit share of $5.9M, which was 2% higher than the
prior fiscal year
Internal asset management decreases fees as a percentage of
assets
*Average Month-end NAV used to calculate Alpha $
Non-U.S. Equity Total
# of Portfolios 11
Average NAV* $6,538,925
Performance
(Net of Fees, unhedged) -8.53%
Benchmark
(unhedged) -9.67%
Alpha $
(Net of Fees)* $91,775
Total Fees $23,331
Base Fees $17,477
Profit Share $5,854
Total Fees as a % of NAV 0.36%
Fees as a % of Assets
(External Managers)
Fees as a % of Assets
(with PSERS Internal)
Non-U.S. Large Cap 0.60% 0.28%
Non-U.S. Small Cap 0.76% 0.76%
Emerging Markets 0.90% 0.90%
Total 0.66% 0.36%
38
MLP Investment Manager Fees FY 2016 ($ in Thousands)
Net of fees ($37 million), MLP managers produced $330 million of
alpha over four years
Fees as a percentage of NAV have remained in the 40-60 bps
range
One account earns a profit share. In periods where that account
substantially outperforms the benchmark, fees as a percentage of
NAV will be impacted
Net asset value has doubled as a result of asset allocation
decisions
MLPs now have a 4% target vs. a 2% target in FY 2013
Internal vs. External Management: Prior to August 2015, 100% of
the allocation was externally managed. PSERS implemented an
internally managed, passive MLP portfolio in August 2015 as a tool
to rebalance quickly if necessary or take advantage of market
volatility
*Average Month-end NAV used to calculate Alpha $
MLP Total
# of Portfolios 4
Average NAV* $1,931,792
Performance
(Net of Fees) -18.75%
Benchmark -18.93%
Alpha $
(Net of Fees)* $1,046
Total Fees $8,333
Base Fees $6,956
Profit Share $1,377
Total Fees as a % of
NAV 0.43%
39
Fixed Income Investment Manager Fees FY 2016 ($ in Thousands)
Total fees decreased 20% or $8.8 million over
past fiscal year
Internal asset management decreases fees as a
percentage of assets and represents
approximately one-third of Public Fixed Income
exposure.
Internal asset management was a positive
contributor to alpha generation
*Average Month-end NAV used to calculate Alpha $
^Internally managed
Fixed Income
Public External Internal Total
# of Portfolios 9 3 12
Avg Notional
Exposure/NAV* $6,616,030 $3,308,521 $9,924,550
Performance
(Net of Fees) N/A N/A N/A
Benchmark N/A N/A N/A
Alpha $
(Net of Fees)* -$159,503 $17,734 -$141,769
Total Fees $41,676 $0 $41,676
Base Fees $37,781 $0 $37,781
Profit Share $3,895 $0 $3,895
Total Fees as a % of
NAV 0.55% 0.00% 0.38%
Fees as a % of Assets
(External Managers)
Fees as a % of Assets
(with PSERS Internal)
Barclays Aggregate 0.65% 0.31%
TIPS Notional Exp. 0.41% 0.34%
EM Debt 0.56% 0.56%
Global Bonds 0.28% 0.28%
Long Treasuries
Bonds 0.00%^ 0.00%^
Public High Yield 0.77% 0.77%
Multi-Sector 0.67% 0.67%
40
Private High Yield Debt Investment Manager Fees FY 2016 ($ in Thousands)
Private high yield debt has higher fees than
traditional public high yield debt
Attractive expected return/risk profile
Contractual management fees typically range
between 0.75% to 1.5%
PSERS negotiates fee discounts
whenever possible
Some funds offer discounts for
commitment size and/or first closers
FY 2016 management fees of $40.1 million
were $1.2 million more than FY 2015
NAV increased 14.6% from $2.9 billion
to $3.4 billion
Most funds charge on invested capital
Private High
Yield Debt External Internal Total
# of Portfolios 35 1 36
NAV* $3,384,075 $19,113 $3,403,188
Performance
(Net of Fees) 0.34% -53.48% 0.14%
Benchmark 1.62% 1.62% 1.62%
Alpha $
(Net of Fees)* -$43,316 -$10,531 -$53,847
Total Fees $40,120 $0 $40,120
Base Fees $40,120 $0 $40,120
Total Fees as a % of
NAV 1.19% 0.00% 1.18%
*Average FY 2016 4 Quarter-end NAV used to calculate Alpha $
41
Reasons for year to year management fee increases or decreases:
Increases
1st year funds may be charged on partial years
Some funds have discounts for early closers
Fees are typically charged on invested capital, therefore fees will increase throughout the
investment period as capital is invested
Decreases
After the investment period fees will decrease as investments are liquidated
Estimated changes for FY 2017:
6 funds are making new investments which will increase fees by $4.7 million over FY 2016
6 funds will be in the harvest period in FY 2017 which lower fees by approximately $2.1
million
PSERS will make approximately $700 million in new commitments during FY 2017, resulting
in an estimated $3.15 million of new fees
Private High Yield Debt Investment Manager Fees FY 2016 ($ in Thousands)
42
Commodities Investment Manager Fees FY 2016 ($ in Thousands)
Fees down $2.3 million from last year
PSERS added 2% of total fund assets to
commodities utilizing internal asset
management with no additional fees
*Average Month-end NAV used to calculate Alpha $
Commodities External Internal Total
# of Portfolios 3 2 5
Average NAVs with
Notional* $948,296 $2,815,459 $3,763,755
Performance
(Net of Fees) N/A N/A -1.34%
Benchmark N/A N/A -4.58%
Alpha $
(Net of Fees)* $0 $0 $121,946
Total Fees $5,954 $0 $5,954
Base Fees $5,954 $0 $5,954
Profit Share $0 $0 $0
Total Fees as a % of
NAV 0.63% 0.00% 0.16%
0.64% 0.71%
0.77% 0.70%
0.84%
0.64%
0.43%
0.29%
0.16%
$0
$5,000
$10,000
$15,000
$20,000
$25,000
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2016
Total Manager Fees and Fees as a % of Assets
Fees $ Fees as a % of Assets
43
Real Estate Investment Manager Fees FY 2016 ($ in Thousands)
FY2016 management fees of $52
million were $16.9 million less
than FY 2015
Sold $1.5 billion in the
secondary market during
FY2016
Most funds charge on the full
commitment during the
investment period and on
invested capital during the
harvest period
Contractual management fees
range from 0.75% to 1.75%
PSERS negotiates fee
discounts whenever
possible
Some funds offer discounts
for commitment size and/or
for first closers
Real Estate Private -
External
Public/PTRES
External
Private
Internal
Public/PTRES
Internal Total
# of Portfolios 108 1 1 1 111
Average NAV* $5,076,126 $193,419 $199,322 $102,973 $5,571,840
Performance
(Net of Fees) 8.44% 23.75% N/A 22.90% 9.37%
Benchmark 5.01% 23.55% N/A 5.70% 5.02%
Alpha $
(Net of Fees)* $174,111 $785 N/A** $17,711 $192,607
Total Fees $52,006 $0 $0 $0 $52,006
Base Fees $52,006 $0 $0 $0 $52,006
Total Fees as a
% of Commit or
Inv Capital
1.02% 0.00% 0.00% 0.00% 0.93%
*Average FY 2016 4 Quarter-end NAV used to calculate Alpha $
**FY 2016 performance data not available to calculate Alpha due to less than one year history
44
Reasons for year to year management fee increases or decreases:
Increases
1st year funds may be charged on partial years
Some funds have discounts for early closers
There may be less fee offsets from prior year
Fees charged on invested capital during the investment periods will increase as capital is
invested
Decreases
Management fees typically drop after the end of the investment period (invested capital
base decreases as assets are sold)
There may be more fee offsets from the prior year
Estimated changes for FY 2017:
6 new funds will be charged full year management fees for the 1st time, increasing fees by $5.6
million over FY 2016
PSERS will make approximately $837.5 million in new commitments during FY 2017, resulting
in an estimated $6.3 million of new fees
7 funds will complete their investment period in FY 2017 which will lower fees by approximately
$1.1 million
Real Estate Investment Manager Fees FY 2016 ($ in Thousands)
45
Private Equity Investment Manager Fees FY 2016 ($ in Thousands)
FY 2016 management fees of $99.5 million were
$2.7 million less than FY 2015
Most funds charge on the full commitment during
the investment period and on invested capital
during the harvest period
Contractual management fees range from 0.75%
to 2.00%
PSERS negotiates fee discounts whenever
possible
Some funds offer discounts for commitment
size and/or for first closers
*Average FY 2016 4 Quarter-end NAV used to calculate Alpha $
Private Equity External Internal Total
# of Portfolios 173 2 175
Average NAV* $7,464,615 $112,037 $7,576,652
Performance
(Net of Fees) 3.59% 28.17% 3.44%
Benchmark 2.11% 2.11% 2.11%
Alpha $
(Net of Fees)* $110,476 $29,197 $139,673
Total Fees $99,493 $0 $99,493
Base Fees $99,493 $0 $99,493
Total Fees as a % of
Commit or Inv
Capital
1.33% 0.00% 1.31%
46
Reasons for year to year management fee increases or decreases:
Increases
1st year funds may be charged on partial years
Some funds have discounts for early closers
There may be less fee offsets from prior year
Fees charged on invested capital during investment periods will increase as capital is
invested
Decreases
Management fees typically drop after end of investment period (invested capital base
decreases as assets are sold)
There may be more fee offsets from prior year
Estimated changes for FY 2017:
13 new funds will be charged full year management fees for the 1st time, increasing fees
by $14.9 million over FY 2016
PSERS will make approximately $1 billion in new commitments during FY 2017, resulting
in an estimated $7.5 million of new fees
7 funds will complete their investment periods in FY 2017 which will lower fees by
approximately $1.8 million
Private Equity Investment Manager Fees FY 2016 ($ in Thousands)
47
Absolute Return Investment Manager Fees FY 2016 ($ in Thousands)
The media portrays the typical hedge fund to charge a 2.0% base
fee and 20.0% profit share
The standard fee for our Absolute Return portfolio would be 1.8%
and 19.3% on a NAV-weighted basis **
PSERS partners with top-tier investment managers that often have
limited capacity. PSERS attempts to negotiate fee discounts
whenever possible, however, in some instances our ability to
negotiate fees has been impeded by capacity constraints
Through negotiations with the investment managers, PSERS
actual fee for the Absolute Return portfolio is 1.5% and 15.3%
on a NAV-weighted basis **
The negotiated discount represents a 14.0% discount off the
standard base fee and a 20.6% discount off the standard profit
share **
In dollar terms, the discount represents an annual savings on the
standard base fee of $11 million **
In periods where the individual portfolios’ performance exceeds
their benchmark, the profit shares and the fees as a percentage of
NAVs will increase
*Average Month-end NAV used to calculate Alpha $
**Does not include Ellis Lake, Brevan Howard, or Perry Capital which are all in the process of being liquidated.
Absolute Return Total
# of Portfolios 22
Average NAV*
$4,719,559
Performance
(Net of Fees) -3.43%
Benchmark 4.01%
Alpha $
(Net of Fees)* -$351,135
Total Fees $102,343
Base Fees $77,678
Profit Share $24,664
Total Fees as a % of
NAV 2.17%
48
Absolute Return Investment Manager Fees FY 2016 ($ in Thousands)
$137,360 $138,931 $138,992
$149,764
$140,523
$117,236
$102,343
3.40%
2.76%
2.34% 2.54%
2.69%
2.28% 2.17%
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
FY 09-10 FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16
Total Manager Fees and Fees as a % of Assets
Fees Fees as a % of Assets
49
Risk Parity Investment Manager Fees FY 2016 ($ in Thousands)
There were 6 Risk Parity portfolios in FY 2016 (5
external, 1 internal).
Bridgewater Optimal Portfolio has been added
for diversification and alpha generation.
PSERS pays a blended base fee of 59 basis points
on 12% target volatility to external managers.
The fee paid in FY 2016 increased by $5.5 million:
The mandate AUM has increased to 10% from
8% of Total Fund.
Allocation was made to active strategies with
expected alpha generation.
The mandate underperformed the benchmark in FY
2016 due to risk management overlay implemented
by external managers and having more exposure to
commodities vs the benchmark.
The internally managed Risk Parity portfolio has
grown to $2 billion as of June 2016 from $100
million in January 2013 (inception).
The internal portfolio has grown from 5% to
40% of the total Risk Parity mandate
*Average Month-end 12% Volatility Adjusted Exposure used to calculate Alpha $
Risk Parity External Internal Total
# of Portfolios 5 1 6
Average 12%
Volatility Adj
Exposure*
$3,121,587 $1,463,059 $4,584,646
Performance
(Net of Fees) -1.14% 3.44% 0.14%
Benchmark 5.13% 5.13% 5.13%
Alpha $
(Net of Fees)* -$204,108 -$24,667 -$228,774
Total Fees $18,428 $0 $18,428
Base Fees $18,428 $0 $18,428
Profit Share $0 $0 $0
Total Fees as a % of
Vol. Adj. Exposure 0.59% 0.00% 0.40%
50
Currency Hedging Investment Manager Fees FY 2016 ($ in Thousands)
Inception of currency mandate: June 2006 with one manager,
Pareto.
After stagnant relative performance combined with on-going
challenge in FX space for alpha generation, PSERS migrated
from an active currency overlay program to a passive risk-
reducing currency hedging program in FY 2015. The same
passive currency hedging continued in FY 2016.
The strategy change significantly reduced the management
fee from 6 bps to 1 bps on notional value in FY 2015.
Results in fee savings of $2 million on a $5 billion
notional hedged exposure.
The fee was negotiated to stabilize at 2 bps of notional
hedged notional exposure starting FY 2016.
Total fees are embedded within the Non-U.S. Equity
Investment Manager Fees category (slides 26 and 27).
*Average Month-end Exposure used to calculate Alpha $
Currency Hedging Everest
# of Portfolios 1
Average Notional
Exposure*
$4,888,981
Performance
(Net of Fees) 0.18%
Benchmark 0.30%
Alpha $
(Net of Fees)* -$5,939
Total Fees $832
Base Fees $832
Profit share $0
Total Fees as a % of
Vol. Adj. Exposure 0.02%
COMMONWEALTH OF PENNSYLVANIA
PUBLIC SCHOOL EMPLOYEES’ RETIREMENT SYSTEM
Investment Expenses Report
FY 2016
December 6, 2016
Thomas Bauer, John Kemp, Charles Spiller
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