Reduce alternative investments, end outrageous Wall Street fees says NJ AFL-CIO

by Jonathan Adams

The New Jersey State AFL-CIO and its affiliated public employee unions presented a plan to the State Investment Council on Wednesday to responsibly scale back the percentage of alternative investments in the state pension fund portfolio, thereby drastically reducing the astronomical fees paid to Wall Street to manage these alternatives.

The concerns of public employee unions over Wall Street management fees have intensified as the percentage of alternative investments in the state pension system has grown. In FY15, 36% of New Jersey’s pension fund portfolio was invested in alternatives such as hedge funds and private equity, significantly higher than the national average of 25% invested in alternatives. These alternative investments managed by outsiders cost New Jersey £487.71 million in fees and bonuses in FY15. The year before, the tab was £417.58 million.

Charles Wowkanech, New Jersey State AFL-CIO President said, “The performance of the alternative investments does not justify their outrageous cost”.

“Approximately 800,000 active and retired public workers have contributed faithfully to the pension system and have made financial calculations for retirement based on receiving the pension they earned. Let’s stop making Wall Street millionaires into Wall Street billionaires and return to a responsible, traditional allocation of stocks and bonds.”

The plan developed by independent pension system analyst Jeff Hooke of Focus Investment Bank charts a path forward for the unions to work with the Investment Policy Committee on FY17 allocations that diminish pension investments in hedge funds and private equity. The new asset allocation models should re-allocate the hedge fund money into a 60/40 mix of publicly traded U.S. stocks and bonds. Similarly, models should be developed that let private equity commitments “run off” over time with the freed up cash invested in public equities, mostly managed in-house.

Hooke, a nationally recognized expert on pension funds, author and investment banker said, “The idea is to mirror risk/return attributes with lower fees, thus boosting projected returns”. Hooke is a consultant to the New Jersey State AFL-CIO and the New Jersey Public Pension Coalition.

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