Tuesday, March 4, 2014

Charlotte Observer on NC Pension Fund Fees

Today, the Charlotte Observer tried to sort out the debate on the level of fees paid by the NC Pension Fund to hedge fund managers.

The debate has evolved into what fees do Fund of Fund managers pay the managers of the hedge funds that they hire?   Ted Siedle, the consultant hired by SEANC argues that these fees are massive and greatly underreported by the pension fund.   The pension fund (and Andy Silton) argue that Siedle's estimates are overblown.

I think we're missing the point here.  So let me recap.  Until a couple of years ago, nobody cared about the fees being paid by the Pension Fund.   Then, during the Treasurer's reelection campaign, one of her opponents starting raising the issue.   Since then a few vocal critics have continued to argue that the pension fund pays too much in fees and doesn't disclose the fees adequately.  SEANC realized that this was an issue of importance to its members and hired Ted Siedle to look into the matter.

Here are the key issues:

1. The fees are too high.
The article quotes a spokesperson for the pension fund who says that the fees are only  0.52% in total.   0.52% may not seem much, but on $86 billion it is well over $400 million per year.   As a contrast, my personal retirement portfolio with TIAA-CREF has an average fee of 0.1%.   I find it hard to believe that I have better buying power than the State of North Carolina.  My portfolio also outperforms the State's.

2. The fees being paid by the State are not unusual.  
They are the industry standard fees.  The problem is simply that the Pension Fund is allocating too much money to high fee investment products such as hedge fund funds of funds.   This is a debate about poor asset allocation.

3. The Pension Fund does not adequately disclose all the fees paid.
We don't know whether Mr. Siedle's estimates are too high or too low, because these layers of fees are not disclosed.  But my guess is that if they were disclosed - if we saw all of the trading costs and fees incurred by the pension fund - the total fee bill would be well over half a billion dollars.

Let me repeat that: a reasonable guess of total fees must be over $500 million.

This is what SEANC is upset about, and it is what all tax payers and citizens of NC should be upset about.   The State Pension fund is handing over around half a billion dollars annually to Wall Street and in exchange is getting mediocre performance.