Cost containment is a vital yet often unnoticed aspect of pension fund management, according to the executive director of the Massachusetts Pension Reserves Investment Management Board.
"Very few public pension plans spend their time analyzing costs," said Michael Trotsky said in a recent interview.
Trotsky, who has been executive director since 2010 and is also Mass PRIM's chief investment officer, is the architect of the organization's cost-efficiency initiative, Project Save.
Save is an acronym for strategic analysis for value enhancement.
The move comes amid a brighter spotlight nationally on the strategies of public pension funds.
So far, according to Trotsky, the initiative has identified about $100 million in savings, or roughly one-third of Mass PRIM's total annual expenses, to be rolled out over one to two years. It has already realized close to $30 million in savings through moves such as its direct hedge fund investment program in which it closed hedge funds-of-funds accounts.
"There's still a lot of work with Project Save," he said.
In calendar 2013, Mass PRIM generated a 15.2% return for its fund - an investment gain of $7.9 billion that drove the fund's net asset value to the highest since its inception in 1984. It also outperformed the pension fund's benchmark index of 12.6% by 264 basis points, resulting in $1.4 billion in added value above the benchmark.
The fund had a value of $58.2 billion, gross of fees as of Feb. 28. State Treasurer Steven Grossman, who chairs the PRIM board, called PRIM "a model for others to emulate."
According to Trotsky, the savings initiative began in 2012. "We were spending a whole lot of time evaluating the returns of our portfolio. Three things are important: return, risk and cost," he said. "We were very good at returns and we added a risk management team, but then we realized we needed a comprehensive effort to contain costs."
Costs are controllable, unlike returns and risk, said Trotsky. "We never know what the market will give you," he said.
Mass PRIM contracted with Toronto firm CEM Benchmarking to analyze costs and compare them with industry norms. Cost-cutting revolved not just around fee savings but overall operations.
Mass PRIM staff and board members also visited Wisconsin to study the retirement system there.
"What's made us successful is a legacy of innovation," said Trotsky of PRIM, which began in 1984 and has a staff of 35. "PRIM went into private equity and hedge funds to diversify beyond stocks and bonds in the 1980s and 90s."
Before joining PRIM, Trotsky for two years was executive director of the Massachusetts Health Care Security Trust, the state agency charged with managing and investing the $440 million State Retiree Benefits Trust Fund. Previously, he was senior vice president and portfolio manager at PAR Capital Management, a Boston-based absolute return strategy fund.
After the financial markets imploded, Trotsky embarked on a hiring and retention program. In 2013 it made nine new hires, including Sarah Samuels as senior investment officer and director of public markets and investment research.
In April, PRIM added Michael McGirr and Erin McCafferty to its private equity team.
McGirr, a former minor-league baseball pitcher, had been an investment manager at Bain Capital since 2011. McCafferty was a vice president at Bank of America Capital Advisors in Boston, where she managed all aspects of a $4 billion portfolio of buyout, venture capital, and real estate private equity funds.
