The Dallas Police and Fire Pension Keeps Paying its Advisers More Despite Bad Returns

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Our cover story this week deals with the Dallas Police & Fire Pension System, the owners of the much-argued-about Museum Tower project in the Arts District. In researching the story, we obtained a draft of the fund's 2011 annual report, which hasn't been released yet. It shows that although the pension fund had an exceptionally rocky year in 2011, its investment managers made $32 million in "asset management" fees. And those same advisers can expect to do even better in 2012, internal documents show.

Our story focused in on a few of the pension fund's other high-dollar real estate transactions. Real estate is, at this point, the pension fund's single largest asset, making up some 24 percent of its total portfolio.

The pension fund's trustee board recently voted to reduce that number to 15 percent, but that process is expected to take up to two years.

Real estate, though, has turned out disappointing returns for the fund recently: in 2010, it gave them just a 3.07 percent rate of return on their investments, compared with a national average of 11.72 percent. In 2011 it did even worse, returning a 6.4 percent rate of return where the national average was 20.7 percent.

A number of the pension fund's especially ambitious real estate investments have turned out poorly: Painted Hills in Arizona and Lake Luciana in California, for example, both ended up mired in years-long court cases and are sitting empty, which they'll do for the foreseeable future. And some properties just haven't turned out at all: Akard Place, a planned multi-million dollar development in Uptown, never materialized either.

Akard Place is also one of the fund's projects that's managed by CDK Realty Advisors, the seven-person firm that oversees 70 percent of the fund's real estate assets. That's $500 million with one small company. The two entities also share an office building, which they co-own, an unusually cozy relationship between advisor and client.

Management fees to CDK and other investment advisers make up the pension fund's single largest expense. Fees have climbed almost ever year for the past decade. In 2001, DPFP paid $11.5 million in fees. By 2007, as the fund's assets approached $3 billion, it shelled out $17.5 million.

Around 2008, as the pension fund began investing more and more aggressively in alternative investments -- real estate, private equity, natural resources, anything other than traditional stocks and bonds -- those fees spiked. In 2010, the pension fund projected they would pay $18 million in fees. As it turns out, according to the draft of its 2011 annual report, they actually paid $30.9 million to these outside investment managers. In 2011, it paid $32 million.

This record-setting fee-paying is despite the fact that 2011 was the pension fund's worst year in a long time, netting just a 0.3 percent rate of return overall. Real estate and private equity both performed especially poorly.

Management fees are tied in part to performance, according to an October 2011 article in the fund's newsletter written by Steve Umlor, vice-chair of the trustee board. So why is the pension fund planning to pay a record $34.7 million to its investment advisors this year, if some of them performed so poorly?

As it turns out, "performance" means the performance the pension fund hopes the advisors will achieve, as Umlor explained in the same article. "You will notice that portion of the budget shows an increase of 5.21%," he informed 9,000 the cops and firefighters who make up the fund's membership, referring to investment management expenses, "As we are hopeful our assets and investments will significantly increase in 2012."

Whether the assets actually do increase this year or no, it looks like the fund's investment advisors can still count on a big payday.

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