Wednesday, December 19, 2012

State of North Carolina Comprehensive Annual Financial Report

If you live in North Carolina, and ever wondered how your tax dollars are spent, you can find out in the recently published 

If that report seems daunting at 301 pages, you might start with the 21 page

Both reports also include many non-financial statistics including economics, demographics, and employment.

A few highlights:  You can discover facts like North Carolina has fewer teachers in 2012 than 2008.  It also lists the top 10 employers in the state.  The state itself is number 1, and the federal government is number 2.  North Carolina has roughly $9 Billion of debt outstanding and collected about $22 Billion in taxes last year.  Of the $22 Billion collected, $10.4 Billion came from individual income taxes and $7.4 Billion from sales and gasoline taxes while corporate income taxes chipped in $1.2 Billion.

Friday, December 14, 2012

Everyone in the USA should watch this video of David Walker

David Walker from the Comeback America Initiative ran the Government Accountability Office (GAO) as the US Comptroller General for 10 years under Presidents Clinton and Bush (1998-2008). This is a video of his presentation at Dartmouth University. Hear his SOLUTIONS to most problems in government.  If you care at all about our nation's fiscal health you will be fascinated by this video.  Be sure to watch even the questions and answers at the end.  

If you have time to watch Survivor, Dancing with the Stars, Downton Abbey, Duck Dynasty or Honey Boo Boo every week, you have time to watch this video, once.

Wednesday, December 12, 2012

Do I earn too much to have a Roth IRA? Nope.

There is an income limitation for contributing "directly" to a Roth IRA ($173,000 Modified Adjusted Gross Income for 2012 for married couples filing jointly).  However, back in 2010, the income limitation for Roth "Conversions" expired, completely.  Thus, it is not possible to earn too much to have a Roth IRA.  If you exceed the income limitations for a direct contribution to a Roth IRA, one just needs to make a non-deductible contribution to a Traditional IRA then "convert" the Traditional IRA to a Roth IRA as soon as possible.

Annual contribution limits for IRAs and Roth IRAs are $5,000 per person in 2012 and $5,500 in 2013 unless you are over 50 in which case your annual limits are $6,000 and $6,500 for 2012 and 2013, respectively.  Thus, a husband and wife can EACH put $5,000 away this year for a total amount of $10,000, or $12,000 if they are both over 50.  I recommend everyone get money into a Roth IRA every year if at all possible since earnings grow tax free and withdrawals in retirement are also tax free.

Monday, December 10, 2012

The Fiscal Cliff-Hanger: Were the Mayans Right?

Good news!  The US Government has confirmed the end of civilization as we know it WON'T happen on December 21, 2012 - the end of the Mayan Calendar.  The bad news? The Mayans may only have been off by 10 days.  The US will plunge off the so-called "fiscal cliff" on December 31, 2012.  Many folks are probably wondering what this "fiscal cliff" is all about anyways? The "fiscal cliff" is the phrase coined by the United States top economist, Federal Reserve Chairman Ben Bernanke, to characterize the man-made impending economic cataclysm created by our US Congress.
Bernanke said, "Under current law, on Jan. 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."
Congress, in its infinite insanity, decided playing chicken with the US economy via the man-made "debt ceiling" and "budget" crises at least twice every year, was not exciting enough.  So, Congress purposely set up the US economy to drive over a cliff, unless the most dysfunctional group of 535 people ever assembled in world  history, comes to an agreement on whether to steer left, or right and avoid plunging into the abyss.

So, the big question is, "which is Thelma and which is Louise" in this picture from our real-time historical econo-drama?  I'm sure we can all agree that Treasury Secretary Tim Geithner (a.k.a TurboTax Tim among the CPA crowd) is Brad Pitt in this analogy.

My second question is, "should I trademark the term econo-drama?"  Just think of the royalties Dr. Bernanke could have earned had he trademarked "fiscal cliff?"

And lastly, "who will bail out the U.S." if we continue to write our own version of the similar econo-drama, and Greek tragedy, "The Five Little PIIGS" that is playing out on the European stage simultaneously? 

Friday, November 30, 2012

Should I invest in a Roth 401(k)? No, probably not.

Many company 401(k) plans have added a Roth 401(k) option.  I believe most people should NOT use the Roth 401(k) option.  The Roth feature seems very appealing since withdrawals from a Roth account can be made tax-free in retirement.  However, these FUTURE tax-free withdrawals come at a high up-front cost since the employee must pay more taxes right NOW.  Let me go through an example and provide an alternative strategy.

Scenario 1:

Take a married couple, 40 years old, with taxable income of $85,000.  This couple would be in the 25% Federal Income Tax bracket and the 7.75% North Carolina State Income Tax bracket.  Let's assume the couple contributes $15,000 per year to a Roth 401(k).  This means the couple is paying an extra $4,912 in income taxes than if they contributed to a traditional 401(k) plan (15,000 x 32.75%).  So, the couple is paying an extra $4,912 for the privilege of placing $15,000 into a Roth account.

Scenario 2:

My suggestion to this couple is to stop making contributions to the Roth 401(k) and instead switch back to the traditional 401(k).  By switching from the Roth 401(k) back to the traditional 401(k) this couple will have an additional $4,912 in take home pay due to the lower income taxes.  The couple should then take that $4,912 in additional take home pay and contribute that money into a Roth IRA (I suggest doing this at Vanguard and use only low-cost index funds).

Thursday, November 29, 2012

Worsification: Diversification Gone Bad

The North Carolina State Retirement System's pension fund is a perfect example of what I call "worsification" or diversification gone bad.  If one takes a look at the most recent investment performance report by clicking here.  You will notice six asset classes:

  1. Global Equity (publicly traded stocks)
  2. Fixed Income (publicly traded bonds)
  3. Real Estate (partnerships that buy shopping malls and office buildings)
  4. Alternatives (private equity, venture capital, hedge funds)
  5. Credit (junk bonds and bank loans)
  6. Inflation (derivative securities on commodities: eg. futures and options on gold or corn, etc.)

Most folks are familiar with the first two categories which are just traditional stocks and bonds.  But, the next four categories might come as a surprise to some pensioners to discover their retirement is being bet on such items as private equity, hedge funds, junk bonds, and derivatives.  The worst part of the surprise is that the four new categories have all produced returns lower than a simple, traditional, 60% / 40% mix of stocks and bonds.

NCRS 10-year returns
Stocks = 8.0%
Bonds = 6.8%
60/40 Stock/Bond = 7.5%
Alternatives = 5.3%
Real Estate = 3.8%

Wednesday, November 28, 2012

529 College Savings Plans

It's not too late to make a contribution to a 529 College Savings Plan and possibly reduce your state income tax bill (depending on your state and income situation).  

One thing I like about my home state's North Carolina 529 College Savings Plan is the ability to utilize very low cost Vanguard Index funds.  The one minor disappointment is the NC 529 Plan charges an additional 0.25% for administrative expenses, but even that amounts to just $12 for each $5,000 invested.  The second thing I like about the NC 529 Plan (for North Carolina residents) is that there are no income limitations in order to receive a state income tax deduction.  

(see the NC Department of State Revenue statement on the NC 529 College Savings Plan by clicking here)

A married couple in the highest North Carolina tax bracket (7.75% for taxable income over $100,000) can save up to $387 in North Carolina state income taxes with a contribution of $5,000 to the North Carolina 529 College Savings Plan each year.  I view this as the state of North Carolina paying me $387 each year for planning for my children's college education.

Tuesday, November 27, 2012

Hedge Fund Mirage

The highly respected magazine The Economist, printed an article on hedge-fund returns earlier this year. Guess what? They are horrible.  Thus, the name of the article is "Rich Managers, Poor Clients." The Economist article is based on a book called The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True.

Oh, hedge fund managers are indeed brilliant - they are masters at identifying inefficiencies in the market and taking advantage of the uninformed patsies.  Unfortunately, the most uninformed patsies seem to be the clients of the hedge funds themselves!  You see, while the hedge fund industry has made the hedge fund managers wealthy beyond belief, their clients have enjoyed a 14 year annualized return of about 2.1% or about half what you could earn investing in riskless treasury bills!

How can this be?  Every pension fund and endowment in America is piling into hedge funds.  How can the returns be so horrible?  Brace yourself, I'm going to use 3rd or maybe 4th grade math to explain the obvious problem with hedge funds.  What I'm about to tell you was not in The Economist article. Ok, are you ready?

Monday, November 26, 2012

Hedge Fund Futility: Why bother?

A recent study by Goldman Sachs highlights the futility of hedge funds.  

Returns through November:
S&P 500 Index 14%
Average Large Cap Mutual Fund 13%
Average Hedge Fund 6%

In other words, index funds have beaten most mutual funds and crushed most hedge funds.  One of the reasons for poor performance from hedge funds is their fee structures.  Many hedge fund fees are 2% per year plus 20% of all profits.  

Consider this example:
A lucky hedge fund manager beats the S&P 500 Index by 3% this year for a return of 17% BEFORE fees (Given the efficiency of the stock market, this would be a monumental achievement).  2% would come off the top leaving a 15% return.  But, the 20% take of the remaining profits would eat another 3%.  This would leave the investor with a net return of 12%, which would have trailed most mutual funds and all S&P 500 Index funds.  

My advice:

Wednesday, November 21, 2012

US National Debt

If you want to learn about the US National Debt and deficit watch the documentary "Ten Trillion and Counting" (<--click there) from my favorite TV show Frontline on PBS (Tuesdays at 10 PM in the Raleigh area).  You can watch the episode on your computer at the link above or on your TV if you subscribe to NetFlix.

Thursday, November 15, 2012

2012 Tax Brackets and How They Could Change in 2013

I found this very handy 2-page 2012 federal tax rate summary information on the internet.
(If the link above stops working, just send me an email to InvestorCookbooks(at) and I will send you the pdf file)

And you can find your state tax brackets by clicking here.

A lot of folks are curious about how tax rates might change in 2013 as part of the "Fiscal Cliff."  Certain tax cuts passed years ago will "expire" in January 2013 unless Congress agrees to extend the cuts.  Here are the main changes set to take place:

Wednesday, September 12, 2012

How Barack Obama Made His Fortune

Business Insider gives a nice summary of how Barack Obama became wealthy.  With a net worth estimated to be between $3-11 million, he's not Mitt Romney wealthy, but the Obama's have still done VERY well.  The short story is President Obama has made most of his fortune from sales of books he's written.  Book sales were very good before running for president, but sky-rocketed during his win in 2008.  

I was interested to also learn where the Obama's invest their money.  While the majority of the Obama wealth is invested in US Treasury bonds, a significant portion is invested in Vanguard Mutual Funds.  I too have most of my assets invested with Vanguard Funds or ETFs, and recommend that most people do the same. 

Monday, September 10, 2012

You are likely 89% better off than you were 4 years ago

We are less than 2 months away from the election and we will all ask ourselves, "are we better off than we were 4 years ago?"  I can give you one statistic that answers that question with a firm "yes."  The US stock market, as measured by the total return of the S&P 500 Index, is up an astounding 89.0% from 1/20/2009 (Obama's inauguration date) through 8/31/2012.  If you have any money in a 401(k) or IRA or any other investments, you are likely MUCH better off than in 2008. 

I've personally saved a lot of money on underwear the past 4 years as well.  In 2008, whether it was bankruptcies of Lehman Brothers, AIG, or GM, freezing of the credit markets, or simple money market funds breaking the buck, at least one headline per week made me poop my pants.  Is everything perfect in the government and the economy?  Certainly not.  But, we've come a long way baby!

Saturday, September 1, 2012

Finance Clippings: SEC says stock picking should be left to the pros

Finance Clippings: SEC says stock picking should be left to the pros: A rather humorous take on a recent SEC study on "retail investors" - that's you and me (in academic finance they - we - are called "noise tr...

Finance Clippings: NC Pension Fund and Facebook.

Finance Clippings: NC Pension Fund and Facebook.: Unfortunately the State of NC bought a load of Facebook stock at the IPO.  I have no idea why - it seemed to me and to many others that this...

Tuesday, July 17, 2012

Does Your 401(k) Plan Leak Money Like a Sieve?

Everyone should pay very special attention to their next 401(k) investment statement.  It is impossible to know how much we pay in fees in many 401(k) plans.  But, new rules issued by the Labor Department will require 401(k) plans to disclose costs for the first time no later than August 30, 2012.

Tip of the hat: Srini Krishnamurthy at NC State.

Friday, June 22, 2012

To 403(b), or not to 403(b), that is the question

There is an excellent article on 403(b) and 457 retirement plans in the July 2012 edition of Kiplinger's (a personal finance magazine).  Every teacher should read the article, and peruse these two websites:


403(b) plans are typically found in K-12 school districts and other state a local government entities and are similar to corporate America's 401(k) plans.  However, the 403(b) market is referred to as the "Wild West" of retirement systems due to

Tuesday, June 19, 2012

Why Everyone Should Buy Index Funds

Question: What are your odds of picking a mutual fund that beats a low-cost index fund? 

Answer: Zero

Proof: Watch this video of University of Chicago Finance Professor Gene Fama.

Want more proof?: Here's the research behind the video.

Quick Summary:
Famous finance professors Gene Fama (Univ. of Chicago) and Ken French (Dartmouth) analyzed all actively-managed US stock mutual fund data from 1984-2006.  They found

Friday, June 15, 2012


I don't usually blog about how to save money when shopping, but this was just so big, I wanted to tell everyone.  Recently I found a way for my family to save $1,175 per year - on one item.  

Our 7-year old twins both take over-the-counter Claritin for allergies.  There are generic pills available, but I have not found a chewable generic for kids.  I never paid much attention to what we pay for Children's Claritin until BJ's Wholesale Club quit carrying it and we had to begin buying it at Walgreens.  

It seemed quite expensive at Walgreens.  So, being the finance nerd that I am, I created a spreadsheet to calculate the annual cost.  I was a bit shocked when my annual estimate came to $1,532!  

$20.99 per 20 or $1.05 per pill, but my kids need 2 per dose so $2.10 per dose.  With 2 kids and 365 days per year, that means 720 doses per year or 720 x $2.10 = $1,532

Tuesday, June 5, 2012

Gold should be stored in a jewelry box, NOT a retirement account

Click here for another excellent article listing reasons why gold should be stored in a jewelry box and NOT in an IRA. For example, before gold's recent 10-year run, it actually lost money the previous 20 years and thus was neither a good investment nor even a good hedge for inflation.  Keep in mind, if you own a stock index fund (and you should) you essentially already own stocks in companies that mine gold.  Combine that with what is in your jewelry box, and you already have enough exposure to gold.  I'm sure this will rankle my gold bug friends!

Tuesday, May 1, 2012

Tuesday, April 3, 2012

Finance Clippings: Pension fund risky bets fail to pay off.

Finance Clippings: Pension fund risky bets fail to pay off.: Pension Funds are increasingly chasing risky bets to try to hit return targets.   These investments are frequently highly illiquid, expensiv...

Thursday, March 22, 2012

Finance Clippings: Elmer for NC Treasurer.

Thank you Professor Warr for your support!  Click here to go to Richard's blog ---> Finance Clippings: Elmer for NC Treasurer.: A good friend of mine, Ron Elmer, is running for North Carolina State Treasurer.  Ron's platform is pretty straightforward - he believes tha...

Tuesday, March 20, 2012

Janet Cowell: The Treasurer of Wall Street

A review of State Treasurer campaign finance records from shows North Carolina State Treasurer Cowell ranks 3rd in the United States in raising campaign funds from out of state.  Only treasurers from Rhode Island and Iowa raise more campaign funds as a percentage from out of state, and North Carolina Treasurer Cowell actually raised more in dollar terms than both of those states, combined.  

With $782,507, North Carolina Treasurer Cowell raised 10 times the national median from out-of-state campaign contributions.  Which begs the question, "Whose treasurer is she?"  With 40-42% of all of Treasurer Cowell's campaign contributions coming from outside the state of North Carolina, one may conclude Cowell is NOT North Carolina's Treasurer. And, considering Treasurer Cowell even holds campaign fund raisers in New York City, Cowell appears to be the "Treasurer of Wall Street."

   Total Campaign    % Raised    $ Raised
Rank State Treasurer    Funds Raised    Out-of-State    Out-of-State
1 Rhode Island Gina Raimondo $914,216 50% $457,108
2 Iowa Michael Fitzgerald $303,658 48% $145,756
3 North Carolina Janet Cowell $1,863,113 42% $782,507
4 Nevada Kate Marshall $685,101 36% $246,636
5 Colorado Walker Stapleton $932,353 28% $261,059
6 Pennsylvania Rob McCord $6,070,400 25% $1,517,600
7 Ohio Josh Mandel $5,305,421 23% $1,220,247
8 Louisiana John Neely Kennedy $6,258,801 22% $1,376,936
9 West Virginia John Perdue $1,298,997 21% $272,789
10 Arkansas Martha Shoffner $444,275 21% $93,298
11 North Dakota Kelly Schmidt $37,837 21% $7,946
12 Connecticut Denise L. Nappier $1,235,062 19% $234,662
13 Idaho Ron Crane $212,793 18% $38,303
14 Massachusetts Steven Grossman $1,801,309 16% $288,209
15 New Mexico James B. Lewis $344,286 16% $55,086
16 Mississippi Lynn Fitch $1,038,120 12% $124,574
17 Wyoming Joe Meyer $205,024 11% $22,553
18 New York Thomas DiNapoli $5,811,663 10% $581,166
19 Missouri Clint Zweifel $1,691,315 10% $169,132
20 Delaware Chip Flowers $290,449 10% $29,045
21 Indiana Richard Mourdock $868,400 9% $78,156
22 California Bill Lockyer $21,514,309 8% $1,721,145
23 Washington James McIntire $499,570 8% $39,966
24 Florida Jeff Atwater $6,887,622 6% $413,257
25 Alabama Young Boozer $822,562 5% $41,128
26 Kentucky Todd Hollenbach $314,822 5% $15,741
27 Arizona Doug Ducey $1,191,349 4% $47,654
28 South Dakota Rich Sattgast $64,465 4% $2,579
29 Oklahoma Ken A. Miller $813,623 3% $24,409
30 Oregon Ted Wheeler $747,956 2% $14,959
31 Nebraska Don Stenberg $93,500 2% $1,870
32 Utah Richard Ellis $69,750 2% $1,395
33 Texas Susan Combs $14,995,971 1% $149,960
34 Illinois Dan Rutherford $5,409,346 1% $54,093
35 South Carolina Curtis Loftis $839,471 1% $8,395
36 Kansas Ron Estes $103,355 1% $1,034
37 Wisconsin Kurt W. Schuller $840 0% $0
38 Vermont Elizabeth Pearce
                    Median 10% $78,156
Appointed:  Alaska, Georgia, Hawaii, Maine, Maryland, Michigan, Minnesota, Montana, New Hampshire, New Jersey, Virginia
Elected by legislature:  Tennessee

Within North Carolina, long lists of employees from Franklin Street Partners and Womble Carlyle contributed more than $77 thousand in 2008.  Both firms now have very lucrative contracts with the State Treasurer's office.

A review of North Carolina Treasurer Cowell's campaign finance records downloaded from the North Carolina State Board of Elections website reveals pages and pages of contributions from investment managers.  In states such as California, New Jersey, and Connecticut, such contributions are illegal.  Thus, if Cowell were Treasurer of one of those states, she'd be in jail instead of in office.  

Other findings within Cowell's campaign records shows the Treasurer has held a number of campaign fund raisers in New York City including three events in 2008 and one in 2011. But Treasurer Cowell has also expanded to other areas with two events in Washington DC, one in Atlanta, and one in Austin.  

04/10/2008 - Washington DC
04/25/2008 - New York City
07/31/2008 - New York City
09/24/2008 - New York City
10/09/2008 - Atlanta
10/10/2008 - Pennsylvania
09/19/2011 - Austin, TX
07/19/2011 - New York City
08/18/2011 - Washington DC

So far this election cycle, Cowell has raised 50% of her campaign contributions from out-side North Carolina. Shockingly, Cowell has raised more money from New York City than Charlotte!

In fiscal 2011, the North Carolina State Treasurer's office paid an estimated $250-300 million to external investment managers out of the North Carolina Retirement System's pension fund.  Apparently, North Carolina Treasurer Cowell is deemed so vital to New York City's economic future that an employee of New York City contributed to Cowell's campaign fund on 12/28/2011.  The New York City employee's title is "Director of Long Term Planning and Sustainability."  

Saturday, March 17, 2012

NC Treasurer Asleep at the Wheel

Regarding “NC Treasurer sues Bank of N.Y. Mellon” 3/16/2012
Is the North Carolina State Treasurer asleep at the Wheel?  I think so.
Having used it, I know that Bank of N.Y. Mellon has a wonderful analytical system called “Workbench.” Under the Workbench umbrella, is a powerful tool called “Investment Monitor.” Investment Monitor uses Boolean logic to screen portfolio holdings, trading activities, concentration limits, and general infractions of investment guidelines against a pre-programmed set of investment guidelines that should be set up by the State Treasurer’s office. 

"Investment Monitor" is a great tool for post-trade compliance.  If Bank of N.Y. Mellon truly violated their contract with the State Treasurer and the North Carolina Retirement System, the State Treasurer should have known of the “unauthorized” trade the next day and stopped settlement of the trade.  The State Treasurer could easily have avoided a $70 million loss that resulted from a trade completed over three years ago.

Friday, March 9, 2012

Why I'm Running For North Carolina State Treasurer

North Carolina's current treasurer is a PROFESSIONAL POLITICIAN and NOT a professional investment manager (see her lack of investment experience on Linkedin by clicking here).  I invite you to  compare her investment experience with mine (see my investment experience on LinkedIn by clicking here).  The current treasurer started in political office 11 years ago - first winning a seat on Raleigh City Council, then North Carolina State Senate, then on to the next stepping stone - State Treasurer.  While her rise is impressive, it's hardly the proper preparation for her primary function as the sole fiduciary of the $75 billion North Carolina Retirement System.

Under the current treasurer's 3-year tenure, the $75 billion North Carolina state pension fund has significantly under-performed the median public pension fund return by -1.2% per year; falling solidly into the bottom 22% (see page 9 of the Investment Advisory Committee report from 2/29/2011 ).  78th percentile means 78% of the public pensions beat North Carolina's investment returns over the past 3 years.

While 1.2% per year for 3 years may not sound like much, it amounts to a shortfall of $2.7 Billion (yes, that's Billion, with a capital "B").  I'm sure North Carolina could have used that $2.7 Billion elsewhere. The $2.7 Billion in under-performance amounts to roughly $3,175 per pensioner and accounts for the majority of the $3.4 Billion that the pension is currently underfunded.  Keep in mind, the $2.7 Billion we are missing from the state retirement system is an estimate if the fund had only performed in line with the "median" public pension.  I believe if a professional investment manager were running the State Treasurer's office we could do better than median.  For example, a rather simple portfolio of index funds would easily outpace the median pension fund returns (click here to see the evidence) and handily beat the returns produced by North Carolina's pension investment returns.

Unfortunately, it's only getting worse over time.  Of the 31 state pension funds that have a fiscal years ending June 30th, North Carolina ranked second to last  for 2011 investment returns.

Rank State     Return
     1 SD 25.8%
     2 MS 25.4%
     3 AZ 24.6%
     4 DE 24.3%
     5 LA 24.3%
     6 NH 23.3%
     7 KS 22.6%
     8 NM 22.5%
     9 ME 22.4%
    10 OR 22.3%
    11 FL 22.1%
    12 MT 21.8%
    13 CA 21.7%
    14 ND 21.4%
    15 GA 21.3%
    16 AK 21.2%
    17 OK 21.2%
    18 CT 21.2%
    19 WA 21.1%
    20 NV 21.1%
    21 MO 21.0%
    22 ID 20.7%
    23 MD 20.0%
    24 IA 19.9%
    25 IN 19.9%
    26 TN 19.6%
    27 VA 19.1%
    28 KY 19.0%
    29 SC 18.6%
    30 NC 18.5%
    31 PA 18.0%

The fund has even under-performed its own internal benchmark by 1% in 2011 and 0.6% annually for the current treasurer's 3-year reign (see the table here).  What accounts for the 1% annual shortfall versus her own benchmark?

An estimated $337 Million went to line the pockets of Wall Street firms just in 2011.  We can't be certain of the exact amount paid in fees to Wall Street investment mangers since the Treasurer quit the tradition of publishing the list of amounts paid to external investment managers soon after taking office. This reduced disclosure is at odds with the treasurer's stated initiatives that include "Ensure Transparency."  However, we can estimate the huge and growing fees paid to Wall Street out of the pension fund by carefully analyzing the 2011 Annual Report (<--click there for the report).

On page 51 of the 2011 Annual Report the treasurer uses returns "Gross of Fees" when comparing the pension investment returns to its peers.  "Gross of Fees" means not including fees paid.  The Gross of Fees return for 2011 is listed as 18.93% while on page 53 the Net Return for 2011 is listed as 18.48%.  The math is quite simple. The difference is 0.45%.  And, 0.0045 x $74.9 Billion = $337 Million

The estimated $337 million going to Wall Street represents an increase of $117 Million over 2009 levels of $219 Million or an increase of 54% in just two years.  The $219 Million figure comes from the original or "old" 2009 Annual Report that was originally published to the State Treasurer's website.  However, the current form of the 2009 Annual Report listed on the State Treasurer's website is missing those pages.

Fiscal 2011 GROSS Return 18.93%
Fiscal 2011 NET Return 18.48%
Difference 0.45%
Pension Assets  $74,900,000,000
Implied 2011 Manager Fees  $     337,050,000
Reported 2009 Manager Fees  $     219,368,000
Increase  $     117,682,000
% Inc. 54%

With a 54% increase in investment fees paid to Wall Street, one can see why the treasurer stopped disclosing these fees paid.  By the end of her term, Treasurer Cowell will have dispensed over $1 Billion out of the North Carolina Retirement System to Wall Street investment managers in the form of management fees.

But, perhaps the most disturbing issue within the current State Treasurer's office is the obvious "pay-to-play" politics within the office.  Treasurer Cowell openly admitted to a House Committee on campaign finance that campaigning for State Treasurer's office in 2008 did not entail traveling the state, but instead  Mostly, I just sat in a room and dialed for dollars for a year and a half of my life.”  

WRAL did a story on the topic that you can see by clicking here.  But, our own review of Cowell's 2008 campaign finance records shows that she actually held a campaign fund raising event in New York City on September 24, 2008.  Treasurer Cowell must throw a pretty good party as she was able raise hundreds of thousands of dollars from donors in the New York City area in 2008 and ultimately raised more than $700,000 from out-of-state sources that purchased many, many TV commercials that eventually won her the election (click here to see Treasurer Cowell's campaign finance data courtesy

So I asked myself, "Does North Carolina need a State Treasurer that has the audacity to hold campaign fund raisers in New York City?  Shouldn't North Carolina's State Treasurer be a professional INVESTMENT MANAGER and NOT a professional politician?"  I decided someone needed to step up and do something.  And so I decided to run for State Treasurer myself.  

I'm a professional investment manager and NOT a politician.  I don't know how to run a political campaign but I know how to manage investments.  We can manage the state and municipal employees, teachers, police, and firefighter's pension money without lining Wall Street's pockets to manage the investments for us.  With professional investment guidance we can manage most of the money right here in North Carolina at a lower cost and with better results.  I'm convinced we can save hundreds of millions of dollars per year for the State of North Carolina without raising taxes or cutting budgets.

Saturday, February 18, 2012

My 3 Rules for Foreign Stock Investing

My 3 rules for foreign equity investing:

  1. Do not hedge the foreign currency exposure.
  2. Index most (or all) of your foreign equity.
  3. Allocate no more than 10-20% of your portfolio to foreign equity.

The link below will take you to a report with a TON of very useful information.


I will focus on just one important finding in the report above that is somewhat controversial, and I will take it a step or two further.

RULE #1 - Do NOT Hedge

Bottom line, currency hedges don't pay off in the very long term for investors.  Thus, investors from 401(k)s and IRAs, to endowments and pension funds should NOT attempt to hedge these risks.  Here is the most important quote from this report,
"currency exposure of foreign equities is a valuable benefit."  
Many pension funds and endowments hedge their currency risks.  This is a mistake, as the expense outweighs the benefits.  In fact, the currency swings of foreign equity are exactly what creates "diversification" within a large diversified portfolio.

I have confirmed this with my own analysis.  Utilizing classic Harry Markowitz Modern Portfolio Theory via a mean-variance optimizer you can find the efficient frontier using asset class indexes.  You can use the MSCI EAFE Index as the foreign equity piece.  After finding the optimal portfolio (the portfolio on the efficient frontier that maximizes the risk/return trade-off), switch the foreign equity index to MSCI EAFE Hedged Index.  You will find that this makes the entire efficient frontier contract (reduces returns and increases risk).  Case closed in my opinion.  Don't hedge foreign currency risks within a diversified portfolio.

RULE #2 - Index

This is also a reason to index foreign equity exposure in a diversified portfolio since an active manager may take it upon themselves to hedge currency exposures.  Hedging the currency fluctuations defeats the purpose of owning foreign equity in the first place.  Plus, foreign markets are becoming more and more efficient.  This has made it tougher and tougher over time for active foreign equity managers to beat an index fund.

RULE #3 - Allocate 10-20%

Another important consideration is that investing in foreign equities is more expensive than investing in domestic equities.  Expenses are the worst enemy of investors.  Thus, foreign equity should be used only up to the extent that it expands the efficient frontier.  When in doubt, use the smaller amount. Using the same mean-variance optimization technique mentioned above, I have found a little foreign equity is all you need.

The beneficial amount of foreign equity needed is smaller than many investors believe since foreign equity markets are highly correlated with US equity markets during times of stress (meaning foreign stocks tend to go down when US stocks go down).  I have found having more than 20% of a US-based portfolio allocated to foreign equity begins to harm overall portfolio returns due to the contraction of the efficient frontier and the increase in investment expenses.  Over the past 20 years, foreign equity returns have been lower than US equity returns with higher volatility.  You can see this in a previous post of mine (just follow how the black square moves in the chart over time). Thus, after factoring in expenses, a little foreign equity goes a long way in diversifying a US-based investment portfolio that utilizes an annual re-balancing strategy.

Note: I first performed the above analysis 14 years ago.  I'd love it if someone could re-run the analysis and confirm my results.

6 Months of Blogging - thanks for reading!

Tomorrow marks the 6 month anniversary of the Investor Cookbooks blog!
I'd like to say thank you to all of my readers!  Here are some stats about the blog.
  • 2600 page views
  • Readers from every continent (except Antarctica)
  • The top 5 countries are:
    1. US (76%)
    2. Russia (5%)
    3. Germany (4%)
    4. UK (2%)
    5. Norway (1%)

Wednesday, February 15, 2012

Fidelity Freedom Funds Aren't "Free" But Are "Dumb"

Fidelity Investments is known as "Fido" on Wall Street. Maybe it's because their target date retirement funds are dogs?  Fido is known for its actively managed stock mutual funds.  Peter Lynch became famous as the index-beating manager of the Fidelity Magellan fund. And while Magellan has struggled since Peter retired some 20 years ago, Will Danoff and Joel Tillinghast have quietly carried the torch since Peter departed.

Fido still sports a few funds with long impressive track records. Of course, they should have at least a few good track records since they have 259 funds. Exactly 12 of Fido's funds (or less than 5%)  have earned a 5-star rating from Morningstar.  I could see how it would be an easy sell for Fidelity to convince investors to plunk money into their Fidelity Freedom line of target date retirement funds.  Just pick one Freedom fund and Fidelity will allocate your money among the many good Fidelity funds for you.  Unfortunately, Fidelity does not do that.  Instead, Fidelity abuses the Fidelity Freedom target date mutual fund shareholders by using their money as seed money to start new and untested funds with expense ratios much, much higher than the Fidelity Spartan Index Funds.

I've always wondered, "how Fidelity could possibly grow to 259 mutual funds?"  I never could figure out why anyone would invest in a new and untested Fidelity fund when you could place your money with Will Danoff in the Fidelity Contrafund or Joel Tillinghast's Fidelity Low-Priced Stock Fund.  Both gentlemen have managed their funds for more than 20 years and both sport  impressive index-beating track records.  Or better yet, why not put your money in the very low cost Fidelity Spartan Index Funds?  Then, you won't have to keep tabs on Will and Joel's own retirement plans and can focus on your own.

I have finally figured out Fidelity's dirty little secret for funding the launch of new and untested mutual funds.  The Fidelity Freedom target date funds allocate money to Fidelity's new funds.  I took a close look at Fidelity Freedom 2035 Fund and was shocked to discover:

Thursday, February 9, 2012

College Endowment and Public Pension Fund Returns Are Not Good

Most college endowments and public pension funds are plowing more and more money into complicated and expensive "alternative investments" such as hedge funds and private equity in a failed effort to boost returns.  However, my analysis, combined with a recent study of college endowment fund returns and a study of public pension returns, proves most would  be better off if they simply indexed all their money.  In fact, my simulation of index fund returns would have placed easily in the top 25% of all college endowments.

     1-year      5-year    10-year
Median Public Pension Fund      21.6%        4.7%        5.7%
Median College Endowment 19.8% 4.6% 5.5%
Simulated Index Fund Returns* 22.3% 5.8% 6.2%

Perhaps a difference of 0.5% may not seem like much, but it is HUGE when one considers the dollar amounts involved.  A difference of just 0.5% per year over 10 years amounts to: