The State Employees Association of North Carolina has stepped up pressure on state Treasurer Janet Cowell in recent months as she prepares to flex newly won legislative authority to raise the alternative investments allocation of the $83.1 billion North Carolina Retirement Systems, Raleigh.
The North Carolina General Assembly trimmed Ms. Cowell's request for an overall 40% alternatives allocation to 35%; the current cap is 34%. Still, her investment team may raise allocations within specific categories.
New caps are 10% on real estate, 8.5% on hedge funds, 8.75% on private equity and other private investments, and 7.5% each on inflation and credit strategies. Hedge funds had been capped at 6.5% and private equity was counted under an “other alternatives” cap of 7.5%.
Officials at SEANC, an affiliate of the Service Employees International Union, are unhappy with growing allocations to what they view as riskier investments like hedge funds and private equity, and are particularly critical of the fees paid to those managers.
Noting the third-quarter 2013 net-of-fees returns of 4.89% overall and 2.39% for alternatives, Ardis Watkins, Raleigh-based SEANC legislative affairs director, argued a more traditional equity/bond portfolio would have meant better returns and saved “hundreds of millions of dollars we wasted on fees for these investment managers.”
For the fiscal year ended June 30, which preceded its receiving the authority to raise the allocation to alternatives, the North Carolina pension fund returned 9.52%, ahead of its 7.25% assumed rate of return and 8.4% benchmark. Credit strategies gained 17.45%, real estate rose 10.9%, and other alternatives were up 5.81%, while the inflation-protection portfolio dropped 2.95%.
As of Sept. 30, hedge fund performance topped its benchmark by one basis point, both for one- and three-year periods, while private equity trailed its benchmark by 23 basis points for the year and 32 basis points over three years.
A May 2013 review of North Carolina investment fees by the fiduciary services unit of Hewitt EnnisKnupp, the retirement system's investment consultant, found that private equity and real estate fees were “reasonable” compared to a universe of similar investments, and management fees for most credit strategies and inflation protection investments were below industry comparables.
To keep up the pressure on both transparency and fees paid to alternative money managers, in January SEANC hired Benchmark Financial Services Inc. from Ocean Ridge, Fla., to conduct a forensic investigation of money manager contracts with the state.
Mindful of pay-to-play practices discovered during the tenure of Ms. Cowell's predecessor, Richard Moore, SEANC officials are hoping a forensic investigation will also put pressure on the retirement system to reduce fees and conflicts of interest, and shine more light on alternatives investments' costs and outcomes. The wide-ranging assignment includes looking at investment conflicts of interest, fees paid, disclosure practices and the use of placement agents. Less-traditional investments like private equity, hedge funds and real estate will be scrutinized for risks related to valuation and liquidity.
SEANC Executive Director Dana Cope commends Ms. Cowell for agreeing to cooperate with SEANC's requests for all memos, agreements and contracts related to the pension fund's investments since January 2003. Mr. Cope is also asking for disclosure of all investment-related fees paid, including those paid tointermediaries such as placement agents, and to see all correspondence with regulators or law enforcement agencies since 2008.
“I think it will be a learning experience for all,” said Ms. Watkins of SEANC. “If the case is there have been no problems since Moore, that's great.”
