Increasing the "alternative investments" allocation to 35% within the North Carolina Retirement System (NCRS) pension fund, will increase Wall Street fees paid by the pension fund by 42% or $160 million PER YEAR and that is exactly what Senate Bill 558 will do. As NC State Finance Professor Richard Warr recently told the NC House Finance Committee, "there will be champagne toasts all over New York City" if Senate Bill 558 becomes law.
The following table shows the impact of Senate Bill 558 on investment expenses in North Carolina's pension fund:
North Carolina's already high allocation to alternative assets are partly responsible for why 70% of all public pension fund returns beat our returns the past three years. And, it's only getting worse as 83% beat our returns the past year (see page 38 in the May 29, 2013 Investment Advisory Committee presentation file by clicking here).
On page 37 of the presentation file above (see snapshot below), you will also find
performance attribution of the pension fund. If you add up the impact of the 5 non-traditional or alternative asset classes for the 5-year period, you will see these alternative assets have already cost our pension fund -0.51% in performance per year for the last 5 years.
Half a percent might not sound like much, but half a percent per year for 5 years on an $80 billion pension fund means alternative assets have cost us $2 billion in underperformance the last 5 years. Senate Bill 558 will just allow our treasurer to throw more good money after bad.
A recent analysis of investment expenses within large state pension funds showed a clear negative correlation between investment expenses and performance. In other words, the higher the investment expenses the worse the investment performance. Passage of Senate Bill 558 will move North Carolina closer to number one in this dubious category.
If you want to try to read NC Senate Bill 558 yourself, here is a quick guide to help understand what it says.
Section (b)(6c) is what our Treasurer calls "Credit Strategies" these are mostly junk bonds.
Section (b)(7) is "Real Estate" where the Treasurer enters into levered real estate partnerships.
Section (b)(8b) is "Hedge Funds" these are mostly levered long-short equity funds.
Section (b)(9) is reported as "Alternatives" by the Treasurer but is 100% leveraged buy-out funds.
Section (b)(9a) is the so-called "Inflation Portfolio" which is mostly futures and options on commodities and other derivative securities.
So here is a quick summary of NC Senate Bill 558. It increases the treasurer's limits on investing in these categories as follows:
The above increases appear to be the minimum increases possible when interpreting the poorly written Senate Bill 558. Section (10a) of the bill appears to expand each of the sections listed in the table above to 10% each. I'm not a lawyer, but Section (10a) appears to contradict the earlier sections of the bill. So, my analysis above that concludes we could see a 42% increase in pension expenses, could be even worse.