Friday, February 8, 2013

Public Fund Fees and Disclosure

Public Fund Fees and Disclosure

The headline in a recent edition of the Triangle Business Journal caught my eye[1].  According to the article, the fees paid by the North Carolina pension plan rose 28% to $318 million for the fiscal year ended June 30, 2012.    When I left the State in 2003, management fees were just under $60 million. I wanted to see how the expansion of the Treasurer’s investment authority had driven fees higher. I clicked on the “open government (transparency)” button[2] on the Treasurer’s website and downloaded the annual report[3].  After reading for about an hour, I still hadn’t found any mention of fees.  While the report was a marked improvement over the reports we’d issued ten years ago, it was far from transparent. 

Reviewing A Business Deal (2008)

The report provided a high level analysis for the performance of the pension plan, as well as the results for each of the plan’s asset categories[4].  However, the report failed to disclose two important questions.  How have the state’s money managers performed; and, how much were they paid.

The California Public Employee Retirement System (CALPERS) probably has the most complete disclosure of the performance of its managers and their remuneration[5].  I decided to take a quick and unscientific tour of state pension plans, and see whether the level of disclosure in other states was closer to CALPERS or North Carolina.  I read the investment sections for Florida SBA[6], Virginia Retirement[7], South Carolina Retirement System[8], Texas Teachers[9], and New York State Common Retirement System[10].  While the disclosures varied, no one came up to CALPERS’ standard, and North Carolina was the least transparent.

Having failed to find any information on fees, I eventually found North Carolina’s $317 million in fees in the Government Investment Operation Report[11].  However, there was little detail.  All I know is that North Carolina is paying its managers about 0.43%, which seems to be about average.  For example, CALPERS doles out $963 million in fees or 0.48% of its assets, and Florida SBA pays $345 million or 0.46%.  Of course, all these numbers are understated because they do not include carried interest on alternative investments.  By the way, South Carolina paid out $304 million in fees or a whopping 1.27% of its assets.  I doubt there’s a plan in the United States paying such a high level of fees.

What are public pension plans getting for their fees?  Not much.  Over the past ten years, the North Carolina pension plan has eked out 6/100 of 1% over its benchmark, and underperformed in all the other reported time periods.  In fairness, the plan has invested with a large number of new managers, who draw down capital, but do not produce immediate gains.  However, when you look at the other programs in my unscientific tour, there’s not much room for optimism.  Neither Virginia nor CALPERS have beaten their benchmarks over meaningful time periods, and they’ve been involved in alternative investments for a considerable period of time.  And, New York doesn’t bother to publish a benchmark for its overall portfolio.  The other states have eked out small gains for at least some period of time.  More importantly none of these plans have come close to earning the assumed return that underpins their actuarial assumptions.

Extrapolating from my sample set, I’m guessing that US public pension plans generate about $11-$11.5 billion in annual fees.  Undoubtedly there’s a growing divide between conventional and alternative investments.  Fees for stock and bond managers are going down, while alternative managers are earning a windfall.   Clearly, there’s more than enough business for money managers to keep flying to Sacramento, Tallahassee, and Raleigh.  Traditional managers will be booked on commuter jets and take shuttle buses to pick up their car rental.  Their alternative counterparts will park their jet at the general aviation terminal and be met by drivers.

Taxpayers and beneficiaries should be rather upset about this state of affairs, because this mountain of fees isn’t creating value.  At a minimum they are entitled to know who is being paid and how they are performing.

[4] The investment statute in North Carolina is antiquated.  The Treasurer is authorized to invest in a list of permissible investments.  Historically, the investments were limited to stocks, bonds, real estate and a sliver of venture capital.  In 2001, the General Assembly added alternative investments, although the words alternative, hedge fund, and private equity were missing from the amendment.  More recently, the General Assembly broadened the investment authority, yet again, leading to three new categories: hedged, credit, and inflation-protected.  N.C.G.S. § 147‑69.2.  The statute is a model of non-transparency.

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