Why I am supporting Ron Elmer for Treasurer

Ron Elmer is running for the democratic nomination for the NC Treasurer.   Ron Elmer is highly qualified for the job.  Here's why:

• He has extensive investment management experience managing institutional mutual funds and index funds.  He's even managed index funds for the State Pension Fund.
• He's very well qualified.  An NYU MBA, a CFA and a CPA.   
• He's not a career politician - he doesn't want to use the Treasurer's office to climb the political ladder.
• He's a really nice guy.

Ron's basic platform is to save the state millions of dollars by bringing the management of the pension fund in house and basically firing all the external managers.   Once in house, he plans to index the entire $90 billion portfolio.    I think that this is a brilliantly simple way that the state can save probably between $500 - $900 Million per year.

Let me state that again:   Ron's plan can save the State at least half a billion dollars per year and potentially close to a billion dollars per year.

This sounds like crazy money, but Wall Street investment firms have been enjoying this payola from North Carolina (and many other states) for years.   It's time to put a stop to this madness.

I've put together a short paper that details my back of the envelope computations which show that these savings are reasonable and there should be no loss in performance of the fund as a result.  In fact, I would expect that the fund will perform better.

Click here for a copy of my report.   

Click here for a copy of a presentation that I did for the State Employees Association a couple of years ago.

And don't forget to vote for Ron and spread the word.

Thanks

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 It is almost impossible to figure out where the money is invested and what the fees are and the information is always out of date.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

The folly of market timing the pension fund

Almost a year ago, the NC Treasurer was pushing a bill to expand alternatives in the pension fund.   At the time, she, and the bill's sponsors argued that interest rates were likely to rise and the bond market would get crushed.   

Sen. Hise, the bill's sponsor said: "I firmly believe the riskiest thing we could be (invested) in right now is the bond market" in the N&O

And in september, Janet Cowell stated stated that "The North Carolina pension fund has always been a big investor in bonds, and that has served us really well, but we're at the end of that runway," on WRAL TV 

Today, the 10 year Treasury yield dropped below 2.5%.  

I'm not knocking Sen Hise, or Treasurer Cowell's ability to forecast interest rates - they had a 50/50 chance of being correct, and indeed, they may still end up being correct that rates will rise.  Or they may not.

The point here is that basing asset allocation decisions on forecasts of interest rates is a poor way to manage $85 billion.  Anyone who thinks that they can reliably forecast interest rates is either is misleading themselves, or the people that they are talking to.  It just cannot be done.  Interest rates will rise and fall, but a diversified portfolio of low cost investments, will, in the long run do OK.

HT:Ron for the heads up on interest rates.

The truth about the NC pension fund's inflation portfolio.

A must read on how the NC Pension Fund is loading up on commodities.   These "assets" aren't investments - they are merely directional bets.  The new SB 558 would allow $6 bn of these gambles.    

Proponents of commodities argue that they are inflation hedges - that they should go up when inflation increases.   While many commodities are correlated with inflation, the risk return trade off is frequently terrible.   You are getting a bit of diversification at a big overall risk.   Top that off with high fees and they are a drag on the overall portfolio.  

Surprisingly to many - one of the best inflation hedges are common stocks - but that's a post for another day.  

NC Senate Finance Committee to consider Alternative Investments Bill tomorrow.

The proposal by the NC State Treasurer to increase the alternatives allocation in the State Pension Fund continues to make its way through committee.   The details of the bill are here.  As I've blogged before, this bill allows the State to invest up to 40% in private equity, real estate and hedge funds.  Treasurer Cowell, appearing on CNBC, argued that the poor outlook on bonds makes alternatives an attractive option.

I respectfully disagree (and others share my view).  Alternatives, and in particular - hedge funds and private equity - are very risky, have very high fees (2% + 20% of all profits is not uncommon), are very illiquid (you can't get your money out), and are very opaque.  On top of that there is little evidence that they outperform more conventional investments.  Hedge funds rely heavily on borrowed money to boost returns - and thus are also sensitive to interest rate increases that could hurt traditional bond portfolios (a point made by Andy Silton today).

The solution to the State's pension shortfall is to slash the hundreds of millions that it pays to Wall Street managers, and to manage the portfolio in passive manner.   This is the only way that will give the Fund a fighting chance of meeting the retirement needs of North Carolina's public employees.

It is worth noting that Ms. Cowell raised the fifth largest campaign fund in the 2012 election.  A total over $1 million.   What is particularly interesting is that one third of her campaign contributions came from "Lawyers and Lobbyists".   Perusing the list of donors is quite enlightening - a great many are from law firms in the north east.   This begs the question - "why are New York lawyers funding the State Treasurer race in NC?"   I obviously can't comment on anyone's personal motivation, but I will note that investing in hedge funds and private equity is very unlike buying stocks.   These investments are very idiosyncratic and require a great deal of legal advice to create the investment contract.

Until recently, investment advisors could make big campaign donations to political campaigns, but the SEC "pay to play" rule took care of that influence.   It would seem time for the SEC to expand this ruling to include securities and investment law firms as well.




As I've stated before, this blog represents my personal views and not that of my employer. Furthermore, I write this blog on my own computer at home.

NC Treasurer race - why fees are what really matter.

The local ABC channel (11) reported last night that the NC Treasurer's office has uncovered wide spread fraud among retirees.  Examples include retirees boosting their income in their last year of work and double dipping by retiring and then returning to work too quickly.

An officer for the Treasurer's office claims that in the later case alone, they've uncovered $1 million of fraudulent payments.   While this is good news, lets get things in perspective.  The state of NC Pension Fund pays over $300 million in fees to Wall Street and still underperforms its peers.  The average management fee for the fund is around 50 basis points (0.5%), which might seem low, but for a fund of this size, this is ridiculously large.   The state should be paying well under 10 basis points.  Remember that 1 basis point of $70 Billion is $7 million!

While stamping out fraud is good, the place to look for real savings is in the fee structure of the fund.  It is for this reason that I'll be voting for Ron Elmer in the May 8 primary for NC Treasurer.   He's pledged to cut management fees by $50 million in his first year or he'll work for free.  You can read more about his plan here.

You can also check out Ron's website here.  You can also visit him on Facebook.


Disclosure:   This blog is my personal blog, posts on it reflect my own personal opinions and do not reflect the views of my employer.   I wrote and posted this on my own computer on my own time.

Why Ron Elmer is running for NC State Treasurer.

http://investorcookbooks.blogspot.com/2012/03/why-im-running-for-north-carolina-state.html

Ron's website is here:  www.elmerfortreasurer.com

Elmer for NC Treasurer.

A good friend of mine, Ron Elmer, is running for North Carolina State Treasurer.  Ron's platform is pretty straightforward - he believes that the $75 billion state pension fund should be run by someone with who is an investment expert.  Ron is an experienced money manager, who, like me, believes that the key to amassing wealth is to minimize the fees that are paid to active managers.  This is true for an individual 401K and also for a multi-billion dollar pension fund.

I'm helping Ron with his campaign.  I'll be using my blog to share some of his ideas as we get closer to the primary date in May.  In the meantime, if you like, you can check out his website and also "like" his facebook page.

www.elmerfortreasurer.com
www.facebook.com/elmerfortreasurer

He's also on twitter @relmbo

If you're interested in helping with the campaign - there's an email link on the website - or send him a message in facebook.

Thanks.


As a final note: This blog is my own personal blog and is not endorsed by NCSU.  Blog postings regarding the Elmer for Treasurer campaign are done outside of my work as a Professor at NCSU and are on my own personal time.