Janet Cowell, the State Treasurer of North Carolina has asked the state legislature for the authority to squander more of North Carolina Retirement System's Pension Fund money on so-called "Alternative Investments." Cowell doesn't want just a little leeway, but wants to place a whooping 40% of the $80 Billion pension fund into these "Alternative Investments" or roughly $32 Billion (yes, that's Billion - with a capital B).
Cowell's request reminds me of the fry cook who delivers your food and says, "I burnt your fries, so I gave you a few extra." There is nothing worse than bad food - except, more of it. Like a bad fry cook, Cowell wants to give North Carolina more of a bad investment. And, our state legislature appears willing to give Cowell what she wants. The proposal passed in the Senate yesterday, so it is up to the House to stop the insanity.
"Alternative Investments" are essentially anything other than publicly traded stocks and bonds. This includes real estate, private equity, hedge funds, and commodities just to name a few. Alternative Investments tend to under-perform traditional stocks and bonds because the investment expenses are outrageously high (this is why Wall Street is so good at selling this trash).
Take a look at the 10-year returns the various asset classes have earned within the North Carolina Pension Fund and you will easily see
why I believe Cowell is throwing good money after bad. The following 10-year annualized return figures were taken from the most recent North Carolina Retirement Systems Quarterly Update Report as of 12/31/2012 on the Treasurer's website.
Asset Class 10-year returns
Global Equity (stocks) 7.52%
Fixed Income (bonds) 6.66%
Alternative Investments 5.54%
Real Estate 3.78%
NC STATE FINANCE PROFESSOR THINKS IT'S A BAD IDEA
Looking at those long-term investment returns, I think anyone with 8th grade math skills would probably decide to invest LESS in Alternative Investments and Real Estate and NOT MORE. You don't need a PhD in finance to come to that conclusion. However, someone with a PhD in finance has looked at the evidence and has come to the same conclusion. Richard Warr is not only a Finance Professor at NC State University, he is the Department Head for the Poole College of Management at NC State.
Professor Warr has come to the same conclusion as me - he thinks investing more in Alternative Investments is a bad idea. You can read Professor Warr's opinion on his blog called "Finance Clippings" by clicking here.
FORMER NCRS CHIEF INVESTMENT OFFICER SAYS IT'S A BAD IDEA
In addition, even a former Chief Investment Officer for the North Carolina Retirement System, Andy Silton has also posted a blog where he states he thinks increasing Alternative Investments is a bad idea for North Carolina. You can read Mr. Silton's opinion on his blog, "Meditations on Money Management" by clicking here. Silton hates the idea so much, he has already blogged about it three times.
In fact, all three of us agree the North Carolina Retirement System should REDUCE its investment in Alternative Investments NOT INCREASE it. Treasurer Cowell is just throwing good money after bad. It is up to the North Carolina House of Representatives to vote this bill down. I encourage you to voice your opinion on Senate Bill 558 with the Speaker of the House, Tom Tillis and with your local representative by clicking here.