Tuesday, July 16, 2013

North Carolina Retirement Systems Investment Expenses Are Out of Control

     Below is a summary of investment expenses incurred by North Carolina Retirement System's (NCRS) pension fund managed by our publicly elected Treasurer. The data are taken from the last annual Government Operations Report from June 30, 2012 provided by North Carolina's Department of State Treasurer.  

     I've calculated an Expense Ratio for each asset class provided in the "Gov Ops report" in much the same way a mutual fund would calculate an Expense Ratio.  I've also included long-term 10-year return information for each asset class where available as printed in the March 31, 2013 NCRS Quarterly Investment Update


     I'd like to point out that the State Legislature is currently mulling over Senate Bill 558 which would give the North Carolina State Treasure authority to invest up to 40% of the NCRS pension fund into Alternative Investments by primarily taking money out of the internally managed bond portfolio.  As can be seen in the table above, every dollar moved from the internally managed bond portfolio to Alternative Investments will incur expenses that are 178 times more expensive as the Internally Managed Bond portfolio.  That isn't a misprint.  Yes, the Alternative Investments portfolio expenses are 178 times MORE expensive than the Internally Managed Bond portfolio.   

     I'd also like to point out in the table above that the more expensive, more complicated, more risky asset classes have underperformed the simpler, cheaper, more liquid asset classes over the past 10 years.  The only people that will benefit from Senate Bill 558 are the investment managers, consultants, and attorneys who have all sold North Carolina's State Treasurer on the idea that somehow Alternative Investments will increase returns of the NCRS pension fund.  But, I think the data above speaks for itself. 

     Perhaps North Carolina's Treasurer should order a subscription to Business Week and Forbes magazines where she could read articles with such titles as "Hedge Funds Are for Suckers" and "Public Pensions Suckers for Private Equity."  Clearly our Treasurer is buying what Wall Street is selling.  But this comes as no surprise as this treasurer raised almost half of her campaign funds for her election from out of state residents.  Many of these out of state contributors are investment managers, consultants, their families, and their attorneys located in and around New York City.  By pushing Senate Bill 558, perhaps this treasurer is merely delivering on campaign promises made at her campaign fund raising events held in New York City?

     Instead of Senate Bill 558, I'd much rather see the Treasurer propose a bill that would allow more internal management of both bonds and stocks.  Our Treasurer would do our state pensioners a service by cutting Wall Street out of our pension.  She should be finding ways to lower expenses not increase expenses. 


  1. Historic returns are a bad estimator for future returns. Your comment seems to be implying, that alterntive investments are not "worth" the expenses. This does not have to be true. Especially considering the currently rising yield curve, a step away from bonds might be worthwhile. I doubt that the entire portfolio of internally managed bonds will have a negative duration, right?

  2. You're theoretically correct. A few expensive alternative investment managers will outperform. NCRS already has over 200 alternative investment managers. Going to 40% alternatives will guarantee underperformance. After adding up all the hundreds of different portfolios the NCRS will always look like "the market" since it is so big and has to hire so many managers. Thus, NCRS will always underperform "the market" by the amount of our expenses. Going to 40% alternative investments will increase expenses by $160 million per year and add hundreds of more managers. Thus, NCRS will just underperform the market by an additional $160 million each year.

    At $80 billion, NCRS is the 10th largest pension in the US. Despite our size, our expenses as percent of assets is 4th highest in the country. No matter how hard someone tries to actively manage the fund, it will always end up looking like and performing like "the market." Thus, our best option is accepting this fact, take what "the market" will give us and keep our expenses as low as possible. That means lots of passive indexing of stocks and bonds and zero expensive "alternative investments."

  3. Also, I don't really understand your last sentence with your question about "negative duration?" The duration of the internally managed bond portfolio is about 7 years according to the most recent data available. According to a Pension & Investments report, the new CIO for NCRS came from Florida whose bond portfolio duration is just 3 years.

    If our Treasurer and CIO are worried about a shift in the yield curve, it would be cheaper and easier to shorten the duration of the bond portfolio rather than double down on their horribly performing alternative investments portfolio.

  4. Cowell doesn't know what fixed income means. See her quote below.

    State Treasurer Janet Cowell took to national TV this week to make a case for why she needs more flexibility when it comes to managing the state's $80 million pension fund.

    Cowell told CNBC's "Fast Money" on Tuesday evening that stocks and bonds are not safe bets right now. The state's retirement money is heavily invested in these areas. "Fixed income is one of the highest risk places you can have your money and that means you're not going to have the money you need for retirement if you are putting your money in bonds,” Cowell said on the show. “Alternatives look increasingly attractive given the volatility of the stock market.”