Tuesday, June 16, 2015

What level of fees should an investor (including a pension fund) pay?

I got an update about my retirement account yesterday from TIAA-CREF.   It was good news - apparently the fees are going down on an equity index fund and also on a bond fund.



Here's a snapshot of the statement.  My fees are now 0.06% and 0.07% for two index products.   Now that is what I call cheap!

It got me wondering, how much would the NC Pension Fund pay at these rates?

Assuming that the NC Pension Fund is about $90 Billion in assets, a 0.07% expense ratio would be about $63 million in fees.

Which raises the question: Why does the NC Pension Fund pay $500 million in fees?  It appears that the fund is overpaying by about $437 Million annually.


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  It is almost impossible to figure out where the money is invested and what the fees are and the information is always out of date.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.



Thursday, June 11, 2015

New editors of the Financial Review

A little shameless self promotion. Srini Krishnamurthy and myself are honored to take over as editors of the Financial Review.
The full details are over on the Poole College of Management site

The Financial Review website is here: financialreview.poole.ncsu.edu

Thursday, June 4, 2015

The hidden risks in target date funds.

My dissertation chair and coauthor, Jay Ritter talks about some of the risks in target date funds.  His primary concern is that these funds tilt towards bonds which implicitly exposes the investor to more inflation risk.

I've blogged about target date funds before, and how they are like hotdogs, but not in a good way.