Index Fund Returns Crush North Carolina Pension Returns (Again)

North Carolina Treasurer Janet Cowell recently released investment returns for the state pension fund.  The press release touted the returns as being slightly better than average over the past 5 years (45th percentile).  However, it is important to keep in mind that the NC pension fund fails to beat a simple mix of low-cost Vanguard index funds.

The table below shows the annualized returns of the NC pension fund compared to a simple portfolio of 5 Vanguard index mutual funds.

Annualized Investment Returns
as of 6/30/2016
	North	Vanguard
	Carolina	Index	Lost
	Pension	Funds*	Returns
1-Year	0.8%	5.4%	4.6%
3-Year	6.1%	8.0%	1.9%
5-Year	6.0%	9.1%	3.1%
7-Year	8.5%	11.2%	2.7%
10-Year	5.5%	7.3%	1.8%

*The Vanguard portfolio uses the same asset allocation the pension fund had when Harlan Boyles left office in 2000, before alternative investments were introduced to the portfolio. The analysis rebalanced the allocation of the Vanguard portfolio once per year.

Treasurer Cowell pointed out that the pension earned 8.5% annualized over the last 7 years - which approximates her tenure as North Carolina's Treasurer.  The simple Vanguard portfolio would have earned 11.2% over the same time period.  This difference of 2.7% per year for 7 years translates into $20 billion of lost returns during Treasurer Cowell's tenure.

For a state whose annual budget is $22 billion, the expansion of alternative investments in the pension fund from nearly zero to over 25% has been a silent fiscal catastrophe.