Sunday, June 14, 2015

Reform needed at the NC Pension Fund.

Andy Silton has a nice piece in today's N&O in which he criticizes the management of the state pension fund.  First - the information provided by the Treasurer's office is awful.   It is almost impossible to figure out where the money is invested and what the fees are and the information is always out of date.

Second, the Treasurer seems to be pursuing a "pick winners" strategy.   This is a fool's errand.   You can't reliably pick winners in today's financial markets.  All you will end up doing is paying high fees to so-called "experts" and getting average performance in exchange.   A mountain of evidence shows this to be true.

What is worse is that the pension fund continues to move into Private Equity and Hedge Funds - both of which are incredibly expensive and do not provide the return for the risk and costs.  As Andy correctly points out, the risk of these assets is understated because they don't trade daily in the markets.

I've been making these arguments for a few years now and during that time the fees paid by the pension fund have gone up from about $300 million/year to about $500 million/year.  

This isn't small change.   The state of North Carolina pays half a billion dollars a year to Wall Street firms who provide worse performance than if the State just indexed the money.  At some point you have to question whether the Treasurer actually understands basic finance.