Publications

CIO resigns from North Carolina Retirement Systems as new state treasurer slashes fees and managers
People - JULY 25, 2017

CIO resigns from North Carolina Retirement Systems as new state treasurer slashes fees and managers

by Larry Gray

Amid some controversy at the North Carolina Department of State Treasurer, Kevin SigRist has resigned from the $94 billion North Carolina Retirement Systems, where he served as CIO since December 2012.

A July 14 article in the Raleigh, N.C., News & Observer noted new State Treasurer Dale Folwell had overruled the recommendations of the pension fund’s investment staff as he shifted money out of stocks and into bonds and cash. It appears the treasurer and CIO did not see eye to eye on strategy or the direction of the pension fund’s investment portfolio.

Folwell, who took office in January, has implemented aggressive fee-cutting measures, in line with his campaign promise to reduce fees paid to investment managers by $100 million during his four-year term. He has accomplished that goal already, reducing fees by more than $60 million on an annualized basis.

In fiscal year 2016, the North Carolina pension fund paid $513 million in management and incentive fees to money managers.

Folwell has terminated contracts with 13 money managers and reportedly renegotiated fees with other managers. He also has stated he is considering moving more money to passive investments, such as index funds. Billions of dollars previously invested in stocks have been shifted to cash and investment-grade bonds, which are managed in house.

While some have applauded Folwell’s moves, others question whether these short-term gains may result in long-term pains for the pension fund. The concern is that the money previously handled by outside managers whose contracts were terminated and is now invested in cash and bonds will earn lower returns, which could hinder the pension fund’s ability to meet its obligations in the long term.

“The concern I have is that cost-cutting seems to be an end in and of itself,” Andrew Silton, former CIO at the pension fund from 2001 to 2005, told The News & Observer.

In a recent blog article, Silton noted he agreed some of the equity managers deserved to be cut due to underperformance, but he also stated some of the fired managers had strong performance track records but charged relatively high fees. In the article, Silton writes, “What I see in the memos and analyses that accompanied the manager terminations is a hodgepodge of rationales designed to justify the treasurer’s promise to cut fees. In some cases, there are sound reasons for terminating a manager. In other cases, the termination isn’t well grounded. I hope this will not be the treasurer’s modus operandi when he tackles the far more complex issue of restructuring and reforming the pension’s hedge fund, real estate and private equity exposure, where the real performance, risk and fee issues reside. While these areas deserve scrutiny, any changes need to be done slowly and carefully. Moreover, it’s important to recognize that real estate and private equity can play a meaningful if modest role in the pension program.”

North Carolina’s pension assumes a growth rate of 7.25 percent, but Folwell and others maintain the pension fund is underperforming. In 2016, the fund grew at 6.3 percent. It was recently reported, however, that the fund recorded a 10.6 percent return for the fiscal year ended in June.

 

Forgot your username or password?