I was hopeful when the State Employees Association of North Carolina (SEANC) turned up the heat on North Carolina State Treasurer Janet Cowell to make changes to the North Carolina Retirement System (NCRS) pension investment operations and reporting by hiring professional pension investigator Ted Siedle and his firm Benchmark Alert. I was hopeful when Treasurer Cowell announced the formation of the Investment Fiduciary Governance Commission to evaluate the State Treasurer's management of the NCRS. I was hopeful when Treasurer Cowell's Governance Commission issued recommended changes that addressed many of Mr. Siedle's concerns and echoed many of my suggestions. Hopeful, but skeptical.
Showing posts with label State Treasurer. Show all posts
Showing posts with label State Treasurer. Show all posts
Wednesday, June 4, 2014
Thursday, July 25, 2013
Bonds are the only safe haven in times of economic stress
When the NC House passed Senate Bill 558 last night, the proponents of the bill said the North Carolina Retirement System pension fund needs to sell a huge chunk of its bond portfolio and put more into alternative investments and real estate. I guess the folks that want this bill have very short memories. They have obviously forgotten that during periods of economic stress (2008 for example) the only true safe haven is bonds.
Not even heaven will be able to help the NCRS pension fund during the next economic stress test if S558 becomes law and our state treasurer sells much of the bond portfolio as she plans. It is mathematical fact that if you don't own bonds, your portfolio will be decimated during economic stress. Here is a quick reminder of how ugly it can get.
How quickly we forget.
The chart below from a recent Vanguard analysis further drives home the point that selling bonds from a portfolio in favor of ANY other asset class raises the risk profile of the portfolio.
Not even heaven will be able to help the NCRS pension fund during the next economic stress test if S558 becomes law and our state treasurer sells much of the bond portfolio as she plans. It is mathematical fact that if you don't own bonds, your portfolio will be decimated during economic stress. Here is a quick reminder of how ugly it can get.
How quickly we forget.
The chart below from a recent Vanguard analysis further drives home the point that selling bonds from a portfolio in favor of ANY other asset class raises the risk profile of the portfolio.
Wednesday, July 24, 2013
Dear Treasurer Cowell: Wheat, Corn, and Aluminum are NOT Investments
The North Carolina House voted 61-51 to allow our state treasurer to invest more pension fund money in junk bonds, hedge funds, leveraged buy-out funds, and commodity derivatives. There are MANY things that bother me about Senate Bill 558, but I guess what bothers me the most about S558 is that it expands the treasurer's ability to "invest" in commodities. The treasurer calls it the "Inflation Portfolio." S558 allows the treasurer to "invest" 7.5% of our $81 billion pension fund in commodities. If one does the math, that means the treasurer can buy up to $6 billion of commodities.
So what does the "Inflation Portfolio" look like? As the snap shot from page 107 the State of North Carolina's Comprehensive Annual Report below shows, the treasurer has already "invested" over $2 billion in such items as wheat, corn, heating oil, crude oil, and aluminum.
North Carolina Retirement Systems
Inflation Portfolio Holdings
1.45 million barrels of crude oil
28.73 metric tons of aluminum
13.57 million barrels of heating oil
7.12 million bushels of wheat
10.12 million bushels of corn
I'm sorry, but the above shopping list is NOT an investment portfolio. Raw aluminum, wheat, corn, and oil are not investments as they do not pay interest or dividends or earn money in any way. These are pure and simple "bets."
So, how have these "bets" paid off? The "Inflation Portfolio" has lost an average of -8.5% per year for the three years the portfolio has been in place.
So what does the "Inflation Portfolio" look like? As the snap shot from page 107 the State of North Carolina's Comprehensive Annual Report below shows, the treasurer has already "invested" over $2 billion in such items as wheat, corn, heating oil, crude oil, and aluminum.
North Carolina Retirement Systems
Inflation Portfolio Holdings
1.45 million barrels of crude oil
28.73 metric tons of aluminum
13.57 million barrels of heating oil
7.12 million bushels of wheat
10.12 million bushels of corn
I'm sorry, but the above shopping list is NOT an investment portfolio. Raw aluminum, wheat, corn, and oil are not investments as they do not pay interest or dividends or earn money in any way. These are pure and simple "bets."
So, how have these "bets" paid off? The "Inflation Portfolio" has lost an average of -8.5% per year for the three years the portfolio has been in place.
Monday, July 22, 2013
NC Senate Bill 558 gives Wall Street a 42% raise, while state employees get nothing
With all the hubbub about the North Carolina budget, how does our Treasurer have the gall to ask our legislature for a 42% budget increase? I'm one of the few who have read and deciphered Senate Bill 558 and gone as far as to translate what it means in terms of expenses within the pension fund. I wonder if Senate Bill 558 would pass if it had to go through the typical state budgeting process?
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
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
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'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.
Tuesday, May 7, 2013
The cook burnt your fries, so I gave you a few extra
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
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
Saturday, February 2, 2013
Wall Street Fees Explode in North Carolina's Pension Fund (I told you so)
The Triangle Business Journal reports "Fees Paid by Pension Fund Soar 28%" to $318 million last year. (see page 6 of the 2/1/2013 issue). I hate to say it, but I told you so. Yep, we poor North Carolinian's, despite having several of the top MBA programs in the nation located in our state, and a huge financial center in Charlotte packed with investment talent, we can't seem to figure out how to manage our own pension fund investments. Instead, we outsource management of the fund at a current annual expense of $318 million.
To put the $318 million of external manager fees into perspective, just consider that over the next 10 years North Carolina will pay Wall Street more than $3.18 billion in investment fees. Given the growth rate of the fees are greater than the growth of the fund, it will likely me MUCH more than that. We should bring the money home and manage it ourselves right here in North Carolina and save ourselves billions of dollars.
According to pages 24-25 of the latest annual report, last year teachers contributed $830 million of their pay checks to this pension fund while other state employees added an additional $333 million for a total of $1.16 billion. The State Treasurer's Office takes 27.3% of state employee and teacher contributions and gives it to Wall Street EVERY year. A ridiculous waste of state pensioner money.
To put the $318 million of external manager fees into perspective, just consider that over the next 10 years North Carolina will pay Wall Street more than $3.18 billion in investment fees. Given the growth rate of the fees are greater than the growth of the fund, it will likely me MUCH more than that. We should bring the money home and manage it ourselves right here in North Carolina and save ourselves billions of dollars.
According to pages 24-25 of the latest annual report, last year teachers contributed $830 million of their pay checks to this pension fund while other state employees added an additional $333 million for a total of $1.16 billion. The State Treasurer's Office takes 27.3% of state employee and teacher contributions and gives it to Wall Street EVERY year. A ridiculous waste of state pensioner money.
Thursday, November 29, 2012
Worsification: Diversification Gone Bad
The North Carolina State Retirement System's pension fund is a perfect example of what I call "worsification" or diversification gone bad. If one takes a look at the most recent investment performance report by clicking here. You will notice six asset classes:
- Global Equity (publicly traded stocks)
- Fixed Income (publicly traded bonds)
- Real Estate (partnerships that buy shopping malls and office buildings)
- Alternatives (private equity, venture capital, hedge funds)
- Credit (junk bonds and bank loans)
- Inflation (derivative securities on commodities: eg. futures and options on gold or corn, etc.)
Most folks are familiar with the first two categories which are just traditional stocks and bonds. But, the next four categories might come as a surprise to some pensioners to discover their retirement is being bet on such items as private equity, hedge funds, junk bonds, and derivatives. The worst part of the surprise is that the four new categories have all produced returns lower than a simple, traditional, 60% / 40% mix of stocks and bonds.
NCRS 10-year returns
Stocks = 8.0%
Bonds = 6.8%
60/40 Stock/Bond = 7.5%
Alternatives = 5.3%
Real Estate = 3.8%
NCRS 10-year returns
Stocks = 8.0%
Bonds = 6.8%
60/40 Stock/Bond = 7.5%
Alternatives = 5.3%
Real Estate = 3.8%
Monday, November 26, 2012
Hedge Fund Futility: Why bother?
A recent study by Goldman Sachs highlights the futility of hedge funds.
Returns through November:
S&P 500 Index 14%
Average Large Cap Mutual Fund 13%
Average Hedge Fund 6%
In other words, index funds have beaten most mutual funds and crushed most hedge funds. One of the reasons for poor performance from hedge funds is their fee structures. Many hedge fund fees are 2% per year plus 20% of all profits.
Consider this example:
A lucky hedge fund manager beats the S&P 500 Index by 3% this year for a return of 17% BEFORE fees (Given the efficiency of the stock market, this would be a monumental achievement). 2% would come off the top leaving a 15% return. But, the 20% take of the remaining profits would eat another 3%. This would leave the investor with a net return of 12%, which would have trailed most mutual funds and all S&P 500 Index funds.
My advice:
Returns through November:
S&P 500 Index 14%
Average Large Cap Mutual Fund 13%
Average Hedge Fund 6%
In other words, index funds have beaten most mutual funds and crushed most hedge funds. One of the reasons for poor performance from hedge funds is their fee structures. Many hedge fund fees are 2% per year plus 20% of all profits.
Consider this example:
A lucky hedge fund manager beats the S&P 500 Index by 3% this year for a return of 17% BEFORE fees (Given the efficiency of the stock market, this would be a monumental achievement). 2% would come off the top leaving a 15% return. But, the 20% take of the remaining profits would eat another 3%. This would leave the investor with a net return of 12%, which would have trailed most mutual funds and all S&P 500 Index funds.
My advice:
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 www.FollowTheMoney.org 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.
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.
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 FollowTheMoney.org).
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.
www.ElmerForTreasurer.com
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.
| 1-year | ||
| 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 FollowTheMoney.org).
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.
www.ElmerForTreasurer.com
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