Investment Fees Spike as State Pension Fund Sheds Billions


ANNAPOLIS (Oct. 23, 2008)—The state pension system had a $16.9 million spike in investment fees last year, even as the value of the pension fund shed billions, officials said Wednesday.

Pension directors attributed the spike to a new investment strategy which they said will stanch the fund's losses and, in the long run, earn more money. But the fund was still criticized in a new report, which called the $89 million in asset management fees "counterintuitive," given the fund's $2.8 billion loss in fiscal year 2008.

For example, the investment in the Templeton Global fund lost 12 percent of its value last fiscal year. But the fees paid for managing the investment rose by 3.5 percent, from $4.17 million to $4.3 million.

Mansco Perry III, the State Retirement and Pension System's chief investment officer, dismissed the criticism from the Department of Legislative Services' report, describing fees in general as "somewhat deceptive."

For example, he said, Baltimore-based Legg Mason had a "very disastrous" performance the last three years, but over the long term booked high returns for the fund.

Legg earned $2.3 million in fees last year, a 20 percent drop from $2.8 million in 2007. The assets it managed, however, plunged by 41 percent, from $1 billion to $614 million.

"We hire managers for their performance over a long period of time," Perry said.

The soured stock and bond markets have caused large investment funds across the country to bleed cash, wiping out trillions in value this year. Maryland's pension system, for instance, lost $7 billion since June 30 alone, dropping from $36.6 billion to $29.5 billion as of Monday.

Pension funds pay money managers to invest and help monitor their assets. According to the legislative services report, the fees paid to these firms generally mirror the value of the assets they manage.

Maryland's new investment strategy, launched in January, has the state moving more money into real estate and private equity, among other areas, from the battered stock and bond markets. Firms that specialize in real estate and private equity often charge higher fees, state officials said.

Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, a trade group, said it's "definitely possible" to pay higher fees with a new investment strategy.

"If they're going into some private equity arrangements, that would not be surprising," she said.

Still, not all of Maryland's investment firms showed an increase in fees last fiscal year. LaSalle Advisors REIT had a 39 percent drop in management fees, from $1.7 million to $1.1 million, while the assets it managed climbed 15 percent, from $411 million to $474 million.

Capital News Service contributed to this report.

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