CEM Benchmarking: North Carolina 2016 PE costs top $100 mln

  • Total investment costs total more than $440 mln, CEM Benchmarking finds
  • Costs fall below median of US pensions, peers
  • North Carolina plans to bring down total costs by $100 mln over four years

North Carolina’s retirement system racked up $444.6 million in investment-management costs in 2016, CEM Benchmarking reported at an investment meeting last week.

The retirement system, managed by the North Carolina Department of the State Treasurer, paid more than $108 million in PE-related fees in the year, according to the CEM report. That total does not include almost $75 million of carried interest paid out to third-party fund managers.

Even as PE fees climbed past $100 million, the investment portfolio’s overall cost was below the median of what the state’s peers paid to manage their portfolios. North Carolina’s annual investment costs represent around 50.5 basis points (0.505 percent) of its portfolio’s value, compared with the 59-basis-point median for the peer group.

CEM Benchmarking attributed the lower costs to North Carolina’s ability to “scale” some of its costs because of its size, which stood at $88 billion during the time period examined by CEM. As of Sept. 30, the retirement system’s portfolio was valued at $96 billion.

Earlier this year, the retirement system’s trustee of its investment assets, State Treasurer Dale Folwell, announced a plan to bring down the portfolio’s total costs by $100 million over the next four years. In 2015, CEM Benchmarking pegged North Carolina’s costs at $422.2 million, or 47.4 basis points.

“In terms of fee savings, we have updated numbers. Treasurer Folwell exceeded his pledge to reduce fees by $100 million over four years. In 2017, fees were reduced by over $60 million for an estimated savings of more than $240 million over four years,” Spokeswoman Stephanie Hawco wrote in an email.

While North Carolina’s costs fell below what was expected, so did its returns. The investment portfolio netted a five-year return of 7.3 percent, falling below the U.S. public-pension median, CEM’s analysis showed. The return was also below the median of the 14 public pensions CEM counts as North Carolina’s peer group.

Almost a third of North Carolina’s total investment portfolio is in low-performing U.S. bonds, depressing its overall returns. Compared with peer institutions, North Carolina is underallocated to investment strategies that generated strong returns over the past five years, such as public stocks or private equity.

That said, North Carolina’s allocation to PE almost doubled, to 9.9 percent from 5.9 percent, over the same period, the study says.

North Carolina’s PE program was valued at $4.9 billion as of Sept. 30. Since its 1988 inception, the portfolio delivered a 7.8 percent internal rate of return through March 31.

Action Item: Read the CEM Benchmarking report: http://bit.ly/2B44tcF