How the AFM-EPF's Investment Fees Actually Measure Up (Updated 12/17)

When the trustees recently made a major statement about how low the AFM-EPF’s investment fees are, we checked it out.


As we know all too well, the trustees spin the facts, especially when assessing their own performance. Everything they say must be checked thoroughly. So, when the trustees recently made a major statement about how low the AFM-EPF’s investment fees are, we checked it out. And not surprisingly, we found their statement failed to tell the whole story. 
In their December 9 email, they point out that their investment fees compare favorably with averages contained in a broad industry study performed by Greenwich Associates. Since the Greenwich Associates study is only available to high paying subscribers (and that does not include MPS), we thought we would simply compare the AFM-EPF investment expenses to the peer group in the entertainment industry.[1] In any event, we think the peer comparison provides a more accurate measurement than a broad, ill-defined industry study.
We took the industry standard measurement, which is the ratio of investment fees[2] to assets under management. It turns out that AFM-EPF investment fees are 84.3% higher than the mean[3] for the entertainment industry peer group. *See note below about how this percentage was calculated.

Screen Shot 2017-12-15 at 9.31.53 AM.png

We also looked at how AFM-EPF compares with our sister fund in Canada, The Musicians Pension Fund, which is affiliated with the AFM. The investment fees of the AFM-EPF are 78%* higher than our Canadian sister fund. 

Screen Shot 2017-12-15 at 9.44.46 AM.png

To get one more relevant comparison, we looked at the investment fees for an index fund like Vanguard. The investment fees of the AFM-EPF are 175%* higher than Vanguard’s:

Screen Shot 2017-12-15 at 9.40.16 AM.png

We need to remember that all these investment fees paid out by AFM-EPF produced worse performance than any of the funds cited above. To take one example, the 10-year annual average return earned by the Vanguard passive index was 6.83%. [4] The 10-year annual average return at AFM-EPF was 3.2%.
Overpaying for investment fees has a corrosive effect on investment returns, especially over long time horizons. Here’s a good explanation of this phenomenon from Vanguard:

“Investment costs might not seem like a big deal but they add up, compounding along with your investment returns. In other words, you don’t just lose the tiny amount of fees you pay, you also lose all the growth that money might have had for years into the future. Imagine you have $100,000 invested. If the account earns 6% a year for the next 25 years and had no costs or fees, you end up with about $430,000. If on the other hand you pay 2% a year in costs, after 25 years you’d only have about $260,000. That’s right: the 2% you paid every year would wipe out almost 40 percent of your final account value. 2% doesn’t sound so small anymore does it?”[5]

Our trustees refuse to acknowledge that the AFM-EPF has an expense problem. As we have previously pointed out (see prior post here), the AFM-EPF has multiple layers of investment managers. First, they have two investment consultants who are taking substantial fees for their overall management of the fund. These two firms choose no less than 25 outside investment managers, each of whom take a cut of the assets under management. Then under these 25 managers, there are often sub-managers who take a further cut. On top of all that expense, AFM-EPF pension plan has a full staff of over 70 people, headed by an executive who earns $425,000 per year. Given the layers of consultants, outside managers, sub-managers, and the full in-house staff, it is no wonder that the AFM-EPF pays by far the most expensive investment fees in the relevant peer group, and has returns that are worst in class.

[1] Screen Actors Guild, Producer Writers Guild of America Pension Plan, Directors Guild, AFTRA Retirement Plan and IATSE National Pension Fund. All data is from 2016 Form 5500s filed with the United States Department of Labor. We took the latest Form 5500 on file for AFM-EPF, which is as of 3/31/16.

[2] Defined as “the total fees paid for advice to the plan relating to its investment portfolio. These may include fees paid to manage the plan’s investments, fees for specific advice on a particular investment, and fees for the evaluation for the plan’s investment performance.” (Instructions, Form 5500)

[3] To be fair, we took the mean rather than the average. Because of IATSE’s very low fees, the average would have produced an even more unfavorable comparison for AFM-EPF.

[4] This consists of 65% S & P 500 index and 35% Bloomberg Barclays US credit A or better bond index.

[5] fees

*We posted this piece describing how the investment fees of the AFM-EPF exceeded the peer group in the entertainment industry, our sister fund in Canada and the Vanguard index. We have received emails from some of you asking whether we have understated the extent to which AFM-EPF expenses outstrip these comparison groups. Some of you have done your own math and believe that the AFM-EPF expenses exceed the entertainment peer group by 146% (rather than the 84% we quoted) the sister fund in Canada by 127% (rather than the 78% we quoted),  and Vanguard by 1437% (rather than the 175% we quoted). 

It is important to understand the distinction between percentage change and percentage difference. Percentage change is the method that produces the higher values cited in the paragraph above but it only applies to changes in conditions over time. For example, an investment portfolio increases or decreases by a percentage change year to year. 

When comparing two static data points like the expenses of one fund versus another, we use the percent difference calculation method. That is what produced the values in our piece yesterday.

Anyone wishing to do their own math can use the following internet calculator which contains the two different methods we just discussed.

So rest assured, our numbers are correct and the methodology we used is sound.