By David G. Barry
At a time when many institutional
investors are looking to reduce fees by handing more assets internally, the
State of Wisconsin Investment Board (SWIB} has been moving in the opposite
direction.
According to a just-released audit
by the State of Wisconsin Legislative Audit Bureau, the proportion of assets
managed internally by SWIB decreased from 64% in December 2017, when it had
$117 billion under management to 53.3% in December 2021 when assets rose to $165.7
billion. The decline was due in part to the increased use of external managers
who execute more complex strategies that required investment infrastructure and
capabilities that SWIB does not possess, according to SWIB’s explanation to the
Audit Bureau.
The Audit Bureau also pointed out that SWIB did not establish either a target
or target ranges for the proportion of its assets to manage internally and did
not establish a written plan for moving certain investment strategies to
internal management.
As a result, it is recommending that SWIB develop a multi-year strategic plan
that includes such goals. By doing so, the SWIB board would have an opportunity
to monitor the plan’s progress, provide input, and assess more thoroughly SWIB’s
future requests for IT, staffing and other significant expenditures the plan believes
are needed to achieve strategic plan goals.
The Audit Bureau’s recommendation related to managing assets internally is one
of 13 that it made to SWIB, including that the pension fund report to the Joint
Legislative Audit Committee by Nov. 30 its work in implementing these
recommendations. Wisconsin statues require the Legislative Audit Bureau to
biennially conduct a performance evaluation audit of the polices and management
practices of SWIB.
Other notable recommendations
include:
·
That the pension plan allow members of the
public to both watch the Board of Trustees meetings online and provide brief
comments at meetings – practices that have become standard at many other public
pension funds. SWIB broadcast its board meetings online during the pandemic but
stopped doing so in December.
·
That
SWIB modify policies, so it is required to report the total amount of external
management fees paid each calendar year. According to the audit, SWIB’s
expenses increased from $472.4 million in 2017 to $702.1 million in 2021, or by
64.3%. This increase, the audit bureau said, was primarily because of an
increase in management fees SWIB paid to external investment managers and a
growth in the total amount of assets SWIB managed. In 2021, it paid out $572.6
million in management fees compared with $338.9 million in 2017. The audit also
noted that SWIB’s carried interest costs – the performance fess paid when a
private equity or real estate manager liquidates an investment – totaled $1.3
billion in 2021.
·
That
SWIB document more precise reasons for awarding salary increases, modify its
policies for awarding signing bonuses and retention bonuses by establishing
more precise criteria for determining the amounts to award and indicate the
circumstances when repayment of a signing bonus may be waved. In 2021, 217 SWIB
staff members received a total of $24 million in bonuses. Total compensation
paid to staff in 2021, including salary, bonuses and fringe benefits, totaled
$72.5 million. The audit also notes that SWIB awarded signing, retention and
severance payments to staff totaling $416,000 in 2020 and $185,000 in 2021.
The audit also said that SWIB’s 20-year average
annual investment return exceed the 6.8% long-term expected rate-of-return
assumption as of December 2021 and that its core fund, which is a diversified
fund that invests for the long term, exceeded its five-year benchmark. It
noted, however, that the plan’s variable fund, a public equities fund, did not,
although just barely.