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The $42 billion Pennsylvania State Employees\u2019 Retirement System (SERS) last month unanimously agreed to end a $300 million foreign-stocks investment for failing to meet targets \u2014 then gave the same firm a fresh $2 billion to invest in U.S. stocks. <\/p>\n
The plan <\/a>to eliminate Center City-based Xponance Inc.<\/a>\u2019s Non-U.S.<\/a> Small Cap Equity fund passed unanimously at SERS\u2019s meeting July 28.<\/p>\n That came 20 months after SERS put the investment on its \u201cEvaluation List,\u201d<\/a> a special status that SERS\u2019s adviser, Callan Inc., told trustees in a memo was \u201cdue to underperformance.\u201d <\/p>\n According to SERS investment data, Xponance, which manages around $25 billion, was the only one of five firms it hired to pick foreign company stocks that has failed to beat its benchmark index of those stocks \u201csince inception.\u201d SERS uses Morgan Stanley\u2019s MSCI ACWI ex USA Small Cap Index<\/a> of foreign stocks, as Xponance\u2019s benchmark.<\/p>\n Xponance actually met or slightly beat that index<\/a> in three of the seven years since SERS invested. But that wasn\u2019t enough to cover larger shortfalls from other years, including 2025, when Xponance trailed the index by 6%, yielding $15 million less than its target. <\/p>\n SERS has paid Xponance more than $10 million <\/a>in fees since hiring the firm\u2019s predecessor, FIS, in 2018, with the support of longtime SERS trustee State Sen. Vincent Hughes (D., Phila<\/a>.).<\/p>\n Hughes and Xponance officials didn\u2019t return calls seeking comment. <\/p>\n In all, SERS paid more than $230 million in fees, profit sharing, and expenses <\/a>to hundreds of investment fund managers in 2024, the last year for which it has published data. <\/p>\n SERS has profited from rising investment valuations in recent years, which helped persuade state lawmakers in July to boost pensions for staff retired more than 25 years<\/a>. <\/p>\n The system also beat its self-imposed annual investment benchmark, currently 6.875% a year,<\/a> by more than one percentage point from 2015 to 2025. That enabled SERS to reduce the \u201cemployee contributions\u201d collected from 67,000 state employees<\/a>, which vary from 5% to 9%, by half a percentage point for three years. SERS collected about five times as much from taxpayers last year, and collects varying amounts from its investments. <\/p>\n While SERS voted to \u201cliquidate\u201d Xponance\u2019s account with one hand, it awarded Xponance a new account with the other. In the same July 28 vote, trustees headed by chairman Gregory Thall, a Harrisburg lobbyist<\/a>, unanimously agreed to give Xponance $2 billion to invest in a \u201cpassive\u201d index fund based on the Russell 3000 index of large and small U.S. stocks. <\/p>\n Though the $2 billion SERS granted is more than six times the $300 million SERS took away, Xponance is still likely to lose significant income in the switch. Xponance charged SERS around 80 basis points a year (that\u2019s 0.8% of the investment\u2019s value) plus expenses \u2014 a total of around $2 million a year \u2014 for the former stock-picking account.<\/p>\n According to a formula in Xponance\u2019s marketing materials<\/a>, for a $2 billion investment in its \u201cpassive\u201d Russell 3000 index fund, the firm would typically charge around $400,000 in client fees a year. That\u2019s less than one-quarter what Xponance charged SERS to \u201cactively\u201d pick and manage foreign stocks.<\/p>\n The highest fees are typically paid to private-equity and real estate investors. Stock-pickers like the former Xponance foreign-stock fund are paid less. Index funds such as the new Xponance fund tend to collect some of the lowest fees. Xponance\u2019s new fees will be \u201cvery competitive,\u201d according to SERS spokesperson Pamela Hile. <\/p>\n SERS said it\u2019s still negotiating the terms of its new Xponance mandate. <\/p>\n \u201cSERS has been laser-focused on negotiating and lowering investment manager fees,\u201d which totaled 0.41% for all managers last year, according to Hile. <\/p>\n Xponance, headed by past Philadelphia city chief investment officer Tina Byles Williams<\/a>, is the only fund managing stocks for SERS that is \u201cowned and\/or controlled by a majority of persons who are women and\/or minorities.\u201d<\/p>\n SERS investment policy \u201cencourages the use of diverse<\/a> investment managers\u201d in all asset classes \u201cwithin the bounds of financial and fiduciary prudence,\u201d adding that a diverse range of professionals contribute different points of view that improve the system and its economic performance.<\/p>\n Among SERS\u2019s more than 200 outside money managers are five other firms controlled by women or diverse owners. Those five firms all manage private assets, rather than publicly traded stocks and bonds like Xponance, according to SERS.<\/p>\n The pension system helps defray the annual cost to taxpayers of funding guaranteed pensions for around 250,000 working and retired state troopers, prison guards, social workers, state college staff, judges, legislators, and other state employees. The majority of its board is appointed by Gov. Josh Shapiro<\/a>. <\/p>\n SERS already pays Mellon Investment Management, a Pittsburgh unit of New York-based BNY Mellon, to manage $14 billion, SERS\u2019s largest single investment, in Mellon\u2019s Russell 1000 big-stock index fund, and for smaller investments in two Russell 2000 small-stocks funds. <\/p>\n The new Xponance investment will be SERS\u2019s only Russell 3000 fund, combining the big- and small-stock indexes. The Russell indexes are licensed to Xponance and other fund managers by the London Stock Exchange Group. <\/p>\n Money for the new Xponance investment will include funds taken from SERS\u2019s Mellon account. <\/p>\n Elsewhere, BNY Mellon has been winning significant new public business. In June, the larger Pennsylvania school pension plan, PSERS, agreed to outsource $20 billion in investments to BNY Mellon<\/a>. <\/p>\n