December 13, 2021
With public pension funds increasing their allocation to alternative investments, they need a systematic, straightforward method to approach their increasingly complex portfolios. Three issues – fees versus returns, the measurement of ESG KPIs, and the monitoring of portfolio exposure – should be on the radar of public pension funds as they seek to trade low interest rates and lower risk for the promise of better returns not tied to the public markets.
1. Ask the right questions to compare management fees to returns
With regards to alternative investments, public pension funds have often wondered if they have all of the information they need when it comes to calculating management fees versus the returns they’re seeing in their portfolios.
It’s important for a public pension fund to have full understanding of performance return vs the management fees paid to obtain that return so that they can draw comparisons to their public market investments and make smarter investment decisions. This diligence on private market investments will ensure they provide a risk-adjusted return above the public markets.
Specifically, public pension funds will know they’re on the right track if they can respond positively to the following questions about their alternative asset portfolios:
- Can we track the age of fees and manager relationships, the commissions related to fund investments, fee budget at fund level, and regular cost analysis?
- Are we able to dig down into specifics and see real-time net-of-fee and gross-of-fee returns by investment, asset class, vintage year, and portfolio (both levered and unlevered)?
- Do we receive reporting from each manager on fees, costs, and expenses, including carried interest?
If public pension funds are increasing alternative investment allocations but unable to obtain this level of information about performance, it may be time to evaluate a solution that can help them gain critical insights into these complex investments so that they can better understand this growing portion of their portfolio.
2. Correctly capture and assess ESG KPIs
With state and local governments quickly evolving to mandate ESG considerations for institutional investing in the US and the EU’s Sustainable Finance Disclosure Regulation (SFDR) in effect as of March 2021, ESG is becoming an increasingly pertinent topic for both GPs and LPs.
A recent article in Institutional Investor notes that “large public pension plans, including New York State Common Retirement Fund, the New Jersey Division of Investments, the Washington State Investment Board, the California State Teachers’ Retirement System, the Seattle City Employees’ Retirement System Board of Administration, and the San Francisco City & County Employees’ Retirement System, are among the institutions making notable allocations to impact investing…” There will undoubtedly be more to follow.
Additionally, according to a survey report published by Cerulli Associates, 20 U.S. public pension plans are members of Climate Action 100+, an investor-led initiative which ensures that the world’s largest corporate greenhouse gas emitters take action on climate change through corporate governance activities. Further, 90% of respondents in the survey believe public pensions will have a moderate-to-high demand for ESG strategies in the next two to three years.
Because of these trends, the ability to track ESG metrics is becoming an increasingly important consideration for due diligence processes, as LPs seek to understand GP support for ESG before making fund commitments. However, without a configurable system to track and monitor ESG KPIs, investors will have difficulties in ascertaining whether their investments are in compliance with ESG investing principles.
DOWNLOAD NOW: A COMPLETE LIST OF ESG KPIS
3. Leverage technology to monitor exposure easily and accurately
One of the biggest challenges facing many public pension funds as they add alternatives to their portfolio is the ability to easily and accurately assess their exposure.
Many funds still rely on manual or one-off systems to collect the relevant data on their underlying holdings. Because of this, their data is gathered piece-meal, without uniform standards, making it difficult to effectively track the risk and exposure in their portfolios across different metrics, such as sector, geography, etc.
By utilizing an all-in-one LP portfolio management platform, pension funds can track, monitor, and report on the performance of both the funds and their underlying assets in an efficient and cost-effective manner.
What’s more, the automated processes provided by an all-in-one technology platform let portfolio managers calculate total portfolio exposure more precisely, evaluate the impact on their portfolio over a chosen time period with greater accuracy, and track and analyze new investment opportunities more swiftly – all of which help to empower superior investment decisions across their alternatives portfolio.
How Allvue’s LP Portfolio Management system helps public pension funds
Allvue’s LP Portfolio Management solution is tailor-made to help public pension funds track investment opportunities and cash flows, analyze investment performance, and model portfolio growth.
With Allvue, public pension funds can also track costs and expenses effectively and get critical insights into fees vs. returns, letting them easily manage all of their activities throughout the entire investment lifecycle, easily capture and asses ESG KPIs to keep up with evolving standards, and gain a deeper understanding of their exposure and associated risk.
