The Candidate for New York’s Chief Money Manager

A candidate vying for the role of Chief Money Manager in New York has announced plans to pull the state’s extensive pension fund—currently the third largest in the US—away from Wall Street firms.

Drew Warshaw is in the race for New York State Secretary, a position that many voters may find challenging to define. This role includes overseeing the state pension fund. If he succeeds in ousting the 18-year incumbent, Thomas DiNapoli, Warshaw intends to shift much of the nearly $300 billion fund into a stable passive index fund.

The New York State and Local Retirement System has over $90 billion invested across complex assets like private equity, private credit, and real estate. While these investments promise high returns—an attractive feature for pension managers responsible for future payouts to retirees—they also come with steep fees.

There’s a pressing question for New York and many other state and local pension funds, as well as charitable organizations and universities worldwide: Are these costly managers worth the prices they charge?

Traditionally, the answer has been yes. Since the 1970s, these “alternative” investments—those not linked to publicly traded stocks or bonds—have been viewed as beneficial. Yet, with large tech stocks like Microsoft and Nvidia skyrocketing recently, doubts about the ability of alternative managers to outperform the broader market are emerging.

Warshaw believes it’s worth reconsidering these investments, though he plans to scrutinize each one closely. NYSLRS hasn’t met its investment return expectations over the past 15 years, leaving uncertainties about its capacity to fulfill its pension obligations.

“I’m starting from a position of skepticism,” Warshaw mentioned in an interview. “These alternative asset classes need to demonstrate their worth. With all this capital flowing into the private market, there’s a point where you revert to the average, and considering the fees, you might end up with below-average returns.”

This sentiment mirrors that of Brad Lander, who became New York City’s Director in 2021, managing the city’s pension fund.

“I started off skeptical about private equity,” Lander said. He replaced the fund’s leading investors—who had an extensive background in the private market—with a team from index giant State Street and initiated a review. However, he now allocates 25% of his investments to private markets, seeking permission from the state legislature to boost that exposure. “My team convinced me that, even with higher fees, we could perform better. But, it requires discipline and healthy debate,” he added.