State of Wisconsin Investment Board Told to Develop Plan to Handle More Assets Internally

By David G. Barry

At a time when many institutional investors are looking to reduce fees by handing more assets internally, the State of Wisconsin Investment Board (SWIB} has been moving in the opposite direction.

According to a just-released audit by the State of Wisconsin Legislative Audit Bureau, the proportion of assets managed internally by SWIB decreased from 64% in December 2017, when it had $117 billion under management to 53.3% in December 2021 when assets rose to $165.7 billion. The decline was due in part to the increased use of external managers who execute more complex strategies that required investment infrastructure and capabilities that SWIB does not possess, according to SWIB’s explanation to the Audit Bureau.

The Audit Bureau also pointed out that SWIB did not establish either a target or target ranges for the proportion of its assets to manage internally and did not establish a written plan for moving certain investment strategies to internal management.

As a result, it is recommending that SWIB develop a multi-year strategic plan that includes such goals. By doing so, the SWIB board would have an opportunity to monitor the plan’s progress, provide input, and assess more thoroughly SWIB’s future requests for IT, staffing and other significant expenditures the plan believes are needed to achieve strategic plan goals.

The Audit Bureau’s recommendation related to managing assets internally is one of 13 that it made to SWIB, including that the pension fund report to the Joint Legislative Audit Committee by Nov. 30 its work in implementing these recommendations. Wisconsin statues require the Legislative Audit Bureau to biennially conduct a performance evaluation audit of the polices and management practices of SWIB.


Other notable recommendations include:

·         That the pension plan allow members of the public to both watch the Board of Trustees meetings online and provide brief comments at meetings – practices that have become standard at many other public pension funds. SWIB broadcast its board meetings online during the pandemic but stopped doing so in December.

·         That SWIB modify policies, so it is required to report the total amount of external management fees paid each calendar year. According to the audit, SWIB’s expenses increased from $472.4 million in 2017 to $702.1 million in 2021, or by 64.3%. This increase, the audit bureau said, was primarily because of an increase in management fees SWIB paid to external investment managers and a growth in the total amount of assets SWIB managed. In 2021, it paid out $572.6 million in management fees compared with $338.9 million in 2017. The audit also noted that SWIB’s carried interest costs – the performance fess paid when a private equity or real estate manager liquidates an investment – totaled $1.3 billion in 2021.

·         That SWIB document more precise reasons for awarding salary increases, modify its policies for awarding signing bonuses and retention bonuses by establishing more precise criteria for determining the amounts to award and indicate the circumstances when repayment of a signing bonus may be waved. In 2021, 217 SWIB staff members received a total of $24 million in bonuses. Total compensation paid to staff in 2021, including salary, bonuses and fringe benefits, totaled $72.5 million. The audit also notes that SWIB awarded signing, retention and severance payments to staff totaling $416,000 in 2020 and $185,000 in 2021.

The audit also said that SWIB’s 20-year average annual investment return exceed the 6.8% long-term expected rate-of-return assumption as of December 2021 and that its core fund, which is a diversified fund that invests for the long term, exceeded its five-year benchmark. It noted, however, that the plan’s variable fund, a public equities fund, did not, although just barely.