Amid cost concerns, North Carolina eyes consultant fees

  • State’s Investment Advisory Committee is “unaware” of consultant costs
  • Committee advises Treasurer Cowell, who has full discretion over investments
  • E&Y, CEM Benchmarking review of fees find no irregularities

A state panel tasked with advising North Carolina Treasurer Janet Cowell on investment-management costs does not know how much the state pension spends on outside consultants.

Aon Hewitt Investment Consulting found the North Carolina Investment Advisory Committee to be “unaware of the total dollar amount of fees spent annually on program consultants,” a memo delivered to Cowell in May says.

The IAC counsels Cowell, who has sole discretion investing North Carolina’s $87.5 billion in pension assets, on topics ranging from asset allocation to manager selection. The six-person committee is also responsible for gauging the cost-effectiveness of the state’s investment program, which frequently contracts with outside consultants for expertise and advice.

Increasing concern about costs

Like officials at many public pensions, the IAC has grown increasingly concerned with how fees and costs can drag down returns, state documents show. Institutions like California Public Employees’ Retirement SystemLos Angeles County Employees Retirement Association and State of Wisconsin Investment Boardrecently launched programs to get a better handle on costs, specifically those relating to private equity and other alternative investments.

North Carolina has undertaken a similar effort. Last year, Cowell’s office tapped accounting firm Ernst & Young to cross-check the pension’s management-fee and carried-interest payments against the amounts dictated by its limited partnership agreements. Ernst & Young’s analysis found North Carolina was paying fees as stipulated by the fund terms, according to state documents.

Similarly, a CEM Benchmarking analysis of the state’s pension found its investment costs were in line with those of similar institutions.

While those reviews improved visibility into the investment program’s aggregate costs, IAC members had “not reviewed the process that staff uses to regularly evaluate its consultants, or determine the reasonableness of overall consultant fees,” Aon Hewitt wrote. “This was mentioned as a potential area of interest to the IAC in the future.”

The Aon Hewitt memo was the product of self-evaluation questionnaires completed by Investment Advisory Committee members, which include Duke Management Co President Neal TriplettJefferies & Co Managing Director Courtney Tuttle and David Hartzell, formerly of Salomon Brothers.

In its memo, Aon Hewitt urged the panel to schedule time for staff to detail its use of consultants. The firm also suggested that North Carolina appoint an independent contractor to evaluate fees charged by its outside managers and consultants.

Aon Hewitt may have incentive to recommend an external review of fees, having previously provided the service to North Carolina in 2013.

“The IAC members thought it might be beneficial to consider engaging in that type of analysis again,” according to the memo.

How such a review would differ from those conducted by CEM Benchmarking and Ernst & Young is unclear. Aon Hewitt declined to comment.

Closer tracking 

Curiously, North Carolina appears to have a fuller view of the amounts charged by investment managers than most public pensions. Its most recent annual report includes a quarterly breakdown of management fees and incentive fees, also known as carried interest, collected by each of its investment managers. Few institutions publicize, or even track, investment-related expenses to that granular a degree.

Contracts with consultants are on file with the state treasurer’s office, spokesmanBrad Young told Buyouts in an email. Young gave no indication as to why the committee is seeking more information about consultant and manager-related fees.

“The Investment Advisory Committee provides advice at a strategic — rather than tactical — level, and contracts are entered into and reviewed by the state treasurer, not by the advisory committee,” he wrote in an email.

“The advisory committee has evaluated overall fees and expenses in the past, and it has received regular benchmarking and performance reviews. The advisory committee recently expressed interest particularly in the fees of consultants.”

Young did not respond to several requests for additional comment. IAC members contacted by Buyouts did not respond to requests for comment.

Action Item: North Carolina IAC: