Bloomberg News

Texas Fund Dismisses GAM to Curb Costs, Retains Mesirow

November 16, 2012

The Texas Permanent School Fund, a $25 billion trust that supports public education, is shifting about $330 million from money manager GAM Holding AG (GAM) as a cost- cutting move.

The board decided against pulling a similar sum from Mesirow Financial Inc. after member David Bradley said the fund’s in-house managers need to develop more expertise in handling the investments. Both Mesirow and GAM had already agreed to reduce their fees.

“This is about getting the best value,” said Thomas Ratliff, a member who voted for the changes. “We will be saving $24 million over the next five years without a significant change in our returns.”

The money invested in hedge funds by GAM would be directed to units of Blackstone Group LP (BX:US) and Grosvenor Capital Management LP. The shift would occur over several months, starting after contracts expire in February. Mesirow also invests trust assets in hedge funds and was given another two years on the job. The board’s finance committee recommended dismissing both firms at a Nov. 14 meeting.

Fund Distribution

Separately today, the board approved a $1.6 billion disbursement from the trust for fiscal 2014 and 2015, starting Sept. 1. Half of the money must be used for instructional materials such as textbooks and computers, under state law. The rest of the funds will be sent to districts and charter schools, in amounts based on enrollment.

GAM fell 5.5 percent in Zurich, where it is based, closing at 11.10 Swiss francs ($11.74). The shares have fallen almost 15 percent during the past four days. Blackstone rose 0.8 percent to close at $13.63 in New York, the first gain in 11 sessions.

The shift from GAM comes as in-house staff is doubling to 39 to help trim $23.7 million in fund-management costs over five years, Chief Investment Officer Holland Timmins said in a report, which assumed Mesirow would also be cut.

While Blackstone, based in New York, and Grosvenor, in Chicago, haven’t agreed to fee cuts, the firms offer “broader experience” in strategic partnerships with pensions and endowments, Timmins said at the fund’s Nov. 14 finance committee meeting. The trust’s overseers in January voted to change hedge- fund investment management to a partnership approach that includes more direct staff involvement.

Joseph Gieger, a GAM USA managing director based in New York, declined to comment on the committee’s recommendation after the Nov. 14 meeting, which he attended. Stacey Coglan, a GAM spokeswoman in London, didn’t immediately respond to a message seeking comment left after normal business hours.

Lopsided Costs

Timmins pushed for the change, saying that 10 percent of assets are lodged with hedge funds, yet they account for 44 percent of investment expenses. Such fees have cost the trust $82.7 million since 2008, according to a document Timmins distributed to Education Board members.

About $2.5 billion in trust assets are placed with hedge funds, Timmins said at the Nov. 14 meeting. Gains net of fees have been about 1 percent since March 2008, when the investments began, according to Timmins’s report.

The trust may take on more risk if it increases management duties for staff members, said Rhett Humphreys of NEPC LLC, the board’s general investment counsel. He recommended that the transition, if approved, be lengthened to three years so in- house employees can gain experience in overseeing hedge funds.

Inexperienced Staff

“If our staff was sitting here today seeking a job, you wouldn’t hire them,” Bradley, a Beaumont insurance agent, said at today’s meeting. “If the program isn’t successful,” he said, “the loss of funds will far exceed any cost savings.”

The committee also ignored longer-term performance by GAM, Humphreys said. Since 2008, money managed by GAM has returned more than funds overseen by both Grosvenor and Chicago-based Mesirow, a unit of Mesirow Financial Holdings Inc., he said. GAM’s results did trail Blackstone’s, he said.

All four companies have funds-of-funds units that pick and oversee hedge funds rather than directly managing the investments themselves.

The trust terminated a fifth “fund of funds,” K2 Advisors LLC of Stamford, Connecticut, in July. K2 had managed $405 million for the trust. That money also was shifted to Grosvenor and Blackstone.

To contact the reporter on this story: David Mildenberg in Austin, Texas, at dmildenberg@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.


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