A new bill introduced in the Oregon Senate could clear the way for the Oregon Investment Council (OIC) to establish a full-blown in-house investment management team. Filed by State Treasurer Ted Wheeler on Jan. 14, the Investment Modernization and Cost Reduction Act would transform the OIC into a corporation, allowing it to hire more staff for internal investment operations. If passed, the bill would allow the OIC to join a handful of other large U.S. public funds that manage investments internally and thereby save on management fees.
The OIC, which has a $79 billion investment portfolio, would begin by moving its large-cap public equities investments in-house. The agency currently manages about $153 million of its investments internally, but that number could jump to almost $17 billion with the addition of its large-cap portfolio. Eventually, the OIC could take over its entire public equities portfolio and possibly its fixed-income portfolio too, according to fund spokesman James Sinks. The move could save the OIC $12-13 million in management fees each year.
The Oregon State Legislature began this year’s session on Feb. 4. Neither Governor John Kitzhaber nor legislators have yet indicated publicly whether they are for or against the bill, but Oregon has a history of converting state agencies into corporations: the State Accident Insurance Fund was converted in 1980, and the Oregon Health and Science University made the switch in 1995. Calls to Wheeler were referred to Sinks.
Ranked as the 11th-largest U.S. public defined benefit fund by iiSEARCHES, the OIC is an outlier among its peers, most of which handle a healthy portion of their investments in-house. The State of Wisconsin Investment Board, for example, manages 54% of its $83 billion portfolio internally with a staff of about 145, while the Florida State Board of Administration runs 43.5% of its $125 billion portfolio in-house. The primary goal is to save on management fees: In its 2012 financial report, the $88.1 billion New York State Teachers’ Retirement Association noted that expenses for its externally managed portfolios were 57 basis points annually, while its internally managed portfolios cost 5 basis points.
While some funds have their own active management teams, most limit their internal investment operations to equity and fixed-income index funds. That is what Oregon aims to do, starting with large-cap equities. Nineteen asset managers collectively handled the OIC’s roughly $16.26 billion global large-cap equities portfolio as of Sept. 30; these included BlackRock, which runs $1.48 billion; Arrowstreet Capital, which handles $1.08 billion; State Street Global Advisors, which runs $1.55 billion; and Pyramis Global Advisors, which runs $952 million.
“I think it makes all the sense in the world,” said Larry Schloss, cio of the roughly $130 billion New York City Retirement Systems. Unlike its counterparts, New York City has no internally managed investments—something that Schloss would like to change. “It’s trying to be more nimble,” he said. “Managing the money in-house is substantially less costly than using outside managers, which is partly why the top 10 US public pension funds average 50% internal management.”Public funds can increase returns by managing a portion of their investments internally, said Schloss, including alternative investments such as real estate and private equity secondaries and coinvestments.
In Oregon, however, the OIC isn’t looking beyond fixed income and equities, which is where many funds draw the line. To internally manage other asset classes would require more resources, and for public funds, more resources can be hard to come by.
Political Hot Potato
Most public funds can’t offer the kind of pay that private asset managers can, which means they either have to raise their salaries or accept a less-talented investment staff. “That’s the hindrance,” said Schloss. “If you’re going to do internal management, you’re also going to need to pay more than we currently pay.” But “it always becomes a political hot potato,” to suggest increasing paychecks, he said.
Oregon has found a possible route around this roadblock. By turning the OIC into a corporation, the new bill would place the council’s hiring and staffing decisions in the hands of a board of directors, rather than the legislature. “It would be difficult for legislators to approve that many hires,” said Sinks. “Good business isn’t always good politics.” If Oregon passes the bill, it would likely not become effective until the beginning of 2014.
Article originally appeared in Money Management Intelligence. Link here (paywall).