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.