Thursday, April 23, 2015

Political Inoculation: North Carolina’s Treasurer Commits to Another Innovation Fund

Political Inoculation: North Carolina’s Treasurer Commits to Another Innovation Fund

Yesterday North Carolina’s State Treasurer Janet Cowell announced a $250 million commitment to a second fund focused on investments in the state.  Like the first fund, this edition of the North Carolina Innovation Fund will be managed by Grosvenor Capital and will make investments in companies as well state-based private equity funds.  According to Treasurer Cowell, the first fund is doing well with an estimated return thus far of 20%.  This blog post is prompted by a couple of sentences in the News & Observer story about this new fund[1]:

Cowell said politics don’t play a role in the fund because it’s run by an outside manager, Grosvenor.

“They are screening these investments,” she said. “They make decisions. It’s not a factor.”

This fund is all about politics.  Why did Hugh McColl, former Chairman of Bank of America and the founder of Falfurrias (one of the first fund’s underlying managers), attend the press conference?  Why did the treasurer hold a press conference at all?  The pension plan makes far larger commitments all the time, and there are no press conferences or even press releases.  Why did the treasurer mention that the first fund had helped to support 6,200 jobs in the state? 

Ever since the pension plan began to invest in equities over forty years ago, North Carolina’s treasurers have attempted to get some political mileage out of directing a bit of the pension’s assets toward managers and investments in North Carolina.  As I’ve written before, when I was CIO over a decade ago my meeting calendar with filled with meetings with many of the very same people who manage money for the Innovation Fund today.  A couple of those folks eventually received mandates from the pension plan.

Treasurer Cowell has simply created the ideal and most expensive vehicle for improving the political optics of directing investments into North Carolina.  By hiring Grosvenor Capital (originally Credit Suisse), the treasurer has a professional intermediary to screen investments.  If the second fund is set up like the first, Grosvenor will continue to show the treasurer prospective investments before they are made, so she has an opportunity to review and turn down deals.  In other words, the treasurer and the Investment Division have far more involvement in the investment decision-making process than is typical in any other investment fund.

Moreover, by having Grosvenor as the manager, the treasurer is also able to avoid any detailed disclosure over the holdings or performance of the underlying investments.  For example, if the treasurer made a direct investment with Falfurrias, she would have to disclose the size of the pension’s commitment, the performance of the investment, and the fees paid to the firm.  The Innovation Fund makes all of that disclosure go away.  As a result, the state treasurer is free to selectively disclose information that is favorable to her position rather than all the information that would give taxpayers and beneficiaries a clear picture.

In fiscal 2013, Grosvenor (Credit Suisse) was paid $1.6 million for providing these services.  We don’t know what they were paid in 2014, because the Treasurer has yet to issue a detailed fee report.  In the same fiscal year, the salaries for all the members of the Investment Division were also $1.6 million.  In other words, the pension spent about 0.65% to retain Grosvenor to mediate the political ramifications of the Innovation Fund, while spending 0.002% to oversee $80 billion in assets.  There’s something wrong with this picture.

I’ve written extensively on the Innovation Fund. 

The King of all Redactions: Carousel Capital

Drawing the Wrong Inference: In-state Investing in NC

Buy Lottery Tickets Instead Of Relying on a Poorly Constructed Report

A Place Where Further Scrutiny Is Warranted: In-State Investing


Wednesday, April 22, 2015

Compounded Disappointment: NYC’s Comptroller

Compounded Disappointment:  NYC’s Comptroller

Two weeks ago the New York City Comptroller Scott M. Stringer, the sole fiduciary of the City’s public pensions, announced that “after fees, manager performance is $2.5 billion below benchmark over 10 years.”  The story was widely reported.  Almost immediately, Dan Primark, the author of Fortune’s Term Sheet, pointed out some basic flaws in the methodology.[1]  Nonetheless, I figured that a detailed study on investment performance might contain some useful insights.  I contacted the Comptroller’s office to get a copy of the report.  Several days later I received a four-page report that provides little insight into the way in which the comptroller’s CIO went about their analysis.  The report has now been posted on the comptroller’s website.[2]

Given the size of the pension plans (over $90 billion) and the returns, I don’t think the comptroller’s overall conclusion is completely off base.  I also think there’s some validity to his charge that alternative assets have been the major source of the pensions’ investment shortfall.  However, it’s disappointing that the analysis is so shallow.

My disappointment was compounded when David Sirota of the International Business Times reminded readers that comptroller was the chief proponent of state legislation to increase the city’s exposure to alternative investments.[3]  Only Governor Cuomo’s veto of the legislation prevented the comptroller from adding to the same investment strategies that he says have not added value.  I commend Mr. Sirota for making the connection.  I’d completely forgotten about the comptroller’s attempt to amend New York City’s investment statute.  I have written about the bill and the weak justification contained in the Comptroller’s supporting memorandum (see, “New York City Pension Seeks More Alternatives [June 6, 2014]”).

Has Mr. Stringer had a change of heart about alternative investments?  According the IBT, the comptroller is still seeking expanded investment authority.  Sadly, the comptroller appears to be another politician who wants to have it both ways.  On the one hand, he wants us to believe that he sees through Wall Street’s false promises.  On the other hand, he remains addicted to the economic and political power of investment bankers and money managers.


Tuesday, April 21, 2015

The NC Pension Plan Approaches $500 Million in Fees; SEANC has been Muted

The NC Pension Plan Approaches $500 Million in Fees; SEANC has been Muted

I have finally found a reason to write about the departure of Dana Cope from his position as Executive Director of the State Employees Association of North Carolina (SEANC).  For those of my readers who are not acquainted with this saga of political intrigue in North Carolina, Mr. Cope used SEANC funds for his personal use.  He left the organization a couple of months ago.

Loyal readers may recall that Mr. Cope was highly critical of our state treasurer’s stewardship of the state pension plan.  Last year, Mr. Cope made a massive public records request and hired a consultant to evaluate the pension.  Sadly, the consultant’s report was long on hyperbolic rhetoric and short of proper analysis.  Moreover, the public records request was a political stunt.  Mr. Cope forced the Treasurer’s office to produce tens of thousands of pages of deal documents without having any intention of evaluating the material.

I am writing about Mr. Cope and SEANC because we could sorely use their voices in acting as a constructive critic of the investment practices of the North Carolina pension plan.  Unfortunately, Mr. Cope was never interested in being a constructive critic, and now SEANC has been deeply wounded by Mr. Cope’s alleged misconduct.

In the last couple of days, the North Carolina State Treasurer posted the department’s annual report for fiscal 2014.[1]  The good news is that the North Carolina Retirement System remains in good shape.    Continued funding by employers and employees together with ebullient financial markets has combined to keep the retirement plans reasonably well funded.

However, the report also shows that the state’s public pensions are spending more and more on money management without getting nearly enough back in return.  The pension plan paid out $490 million in management and incentive fees, an increase of 18% over the prior fiscal year.  Pension assets increased by 13% to $90.1 billion, and the fund earned a return of 9.5%.  While taxpayers and pensioners enjoyed a reasonable year (thanks mostly to rising markets), money managers had an outstanding year.  By the way, this information is dated because it only covers the period ended June 30, 2014.  It’s hard to see why it should take ten months to put out basic information about the fees and expenses of the state’s pension.  Presumably the state treasurer and her staff had this information six months ago.

The report shows that the foray into alternatives has produced some winners, such as a portfolio of credit strategies, and some losers, such as a collection of inflation strategies.  However, the largest alternative allocations, private equity and real estate have failed to beat their benchmarks over most reporting periods.  Meanwhile, the plain vanilla allocations to stocks and bonds continue to move along in concert with their respective markets.  Not surprisingly, the state’s vast collection of money managers produce market-like returns, and active management of the pension doesn’t produce any meaningful value.

As the table below shows, the treasure-trove of fees generated by the pension plan isn’t evenly distributed.    For example, credit managers received over one-quarter of the fees, even though they only manage 8% of the assets, while global equity managers received 22% of the fees even though they manage over two-thirds of the assets.  Credit managers generated $78 million in performance fees because their short-term performance was above their benchmark.  Unfortunately for beneficiaries and taxpayers, those credit managers won’t have to return any of that wind-fall when credit eventually falters.

Percentage of fees earned and assets managed by asset class (FY 2013-14)

As of yet, the Treasurer’s office hasn’t issued a supplementary report showing details of the performance and fees generated by individual managers.  However, I went back to the public records request made by the SEANC to see if could get gain any insight into how credit managers earned those performance fees.  Unfortunately, the Treasurer’s office never released the documents for most of the credit managers.  Among the handful of credit managers whose documents are on the SEANC website, most claimed a proprietary exemption and redacted the incentive fee formula.    In process of trying to find some indication of how credit managers earn their incentive, I ran across the most ridiculous redaction I’ve seen to date.  Highbridge Capital, the manager of something called Highbridge Principal Strategies Irish Specialty Loan Fund III PLC, claimed that entire documents should be redacted.    I’m astounded that the state treasurer’s professional staff accepted this absurd claim.  I’ve included the relevant excerpt from an email below.

The fees generated by the pension plan are going to continue to rise as the state treasurer moves further and further into alternative investments.  While these strategies won’t bankrupt the pension plans, they will cost taxpayers and/or beneficiaries billions of dollars over the next decade.    In recent years, our legislature has endorsed this strategy. 
As a result, there’s no effective check to this continued move into alternative investments.

This is where the SEANC comes back into the picture.  They should be tearing apart the annual report and asking questions.  Instead they have been discredited and are focused on sorting out the damage wrought by their former executive director.


Saturday, April 18, 2015

My Sunday News and Observe column on the essentials of financial planning

My Sunday News and Observe column on the essentials of financial planning

If you are looking for a sensible guide to financial planning, read “The One-Page Financial Plan: A Simple Way to be Smart About your Money” by Carl Richards.

Thursday, April 16, 2015

Exasperation in Three Acts: Act 3 -- The New York Times Buffs Steve Schwarzman’s Image

Exasperation in Three Acts:  Act 3 -- The New York Times Buffs Steve Schwarzman’s Image

When I flipped open the business section this morning, there was Steve Schwarzman, Chairman of Blackstone, lounging on a dormitory bed at Tsinghua University in Beijing.[1]  The article portrays Mr. Schwarzman as some sort of superhuman who can simultaneously oversee the huge General Electric real estate transaction announced earlier this week and delve into the details of the Chinese scholarship program that bears his name. 

I am disappointed in The New York Times.  There’s no news value in this story.  Mr. Schwarzman doesn’t need or deserve free publicity.