The Truth about the NC Pension Fund performance.

An Op-Ed in todays News and Observer.  

Summary:  When the fund sets its own benchmarks, you shouldn't be surprised when it beats them.  But compared to the rest of the USA, NC is 43rd (of 47) in terms of performance.

NC Pension Fund Returns - what is the benchmark?

Ron Elmer has an excellent blog posting showing that although the NC pension fund outperforms its own "custom" benchmark, it has lagged the median return for all public pension funds over 1,2, 5, and 10 years.  

In the past year, the fund underperformed by over 2%.

A couple of observations:

1. The NC Pension Fund benchmark is largely worthless because it changes from year to year and is created by the office that is running the money.   As Ron points out, a simple median of all state pension funds makes a lot more sense unless you believe that NC's pension fund is somehow special.

2. The 10 year underperformance is about -0.38%.   That gap could be eliminated by just reducing fees.  As I've pointed out before, the NC Pension Fund pays way too much in management fees, and lowering those fees by about 1/3 of a percent wouldn't be too hard.   

And in case you're wondering, a very back of the envelope computation of 1/3 of a percent over 10 years is about $2 Billion in fees (assuming $60Bn fund value as a rough average over 10 years).

We are bleeding money to Wall Street.

Refuting an attack on indexation

Probably the best money management blog out there is Andy Silton's "Meditations on Money Management".  Andy is a retired professional, who although in his earlier days was an active manager, now fully subscribes to the notion that you can't beat the market.

Andy's latest post [ here ] - is a rebuttal to a piece in the New York Times profiling Robert Olstein who is an active manager.  Olstein lives in a world where anecdotes and stories carry more weight than hard facts and data.  This is the world that most active managers live in.   They'll claim that of course, most people can't beat the market, but a few can - and they are part of the chosen few.   They'll point to a few good years of returns and say "see how I beat the market?"

All active manager's have stories and anecdotes about how they can beat the market, and if you believe them, then you'll hand over your cash and pay the 1% management fee.   But if you're smart, you'll index.   In the long run you'll be richer - because of the hard facts of the mathematics of finance.  No anecdotes needed.