For North Carolina’s Pension System, Change Is Coming

Newly elected State Treasurer Dale Folwell ran on a promise of lowering manager fees at the sole fiduciary state retirement plan.

It was Dan versus Dale in the Tar Heel State. Dan Blue III, the son of a former speaker of the North Carolina House of Representatives, and Dale Folwell, himself an ex–speaker pro tempore for the same legislative body, squared off against each another for the role of North Carolina state treasurer. In the end Folwell, a onetime vice president and registered investment adviser for Deutsche Bank Alex. Brown before he entered public office in 2005, won on November 8 with nearly 53 percent of the vote, making him the state’s first Republican treasurer since 1876.

When Folwell, 57, replaces incumbent Democratic treasurer Janet Cowell — who made a surprise decision in October 2015 not to run for reelection — in January, he will, among other responsibilities, take over as sole fiduciary of the $89.8 billion North Carolina Retirement Systems. Folwell’s win will probably mean big changes to the public pension system, and a number of outside managers could be in for the high jump.

The newly elected treasurer, who has a CPA, ran on a promise to lower the fees that the pension plan pays to investment managers by $100 million. Among his endorsements was one from the State Employees Association of North Carolina (SEANC), an active critic of how many state employee pension dollars have been going into managers’ pockets in recent years.

When Cowell took office in January 2009, she began boosting the pension plan’s allocation to active management, especially hedge funds and other alternative investments, with the backing of the state legislature. At the time, even in the wake of the subprime mortgage crisis and banking collapse of 2008, a major allocation to active management, in particular alternatives, was considered best practice for sophisticated institutional investors.

Although North Carolina’s commitment to outside managers increased, and with it the fees the pension system paid to manage its money, over the next seven years there was no corresponding uptick in performance. A July 2016 performance review found that the state pension system was in the 38th percentile among its peers over the past decade, with annualized returns of 6.18 percent; in the 50th percentile during the past five years, with annualized returns of 7.03 percent; and in the 49th percentile for the past three years, with annualized returns of 6.61 percent.

For the year ended December 2015, the pension system shelled out $422.2 million in fees, up significantly from 2013, when it paid $377.8 million in fees.


Public pension plans’ growing commitments to outside active managers, which often charge as much as 2 percent in management fees and 20 percent in performance fees, have drawn fire from public sector unions around the country. The unions contend that this money should be paying pension benefits and not enriching asset managers and Wall Street firms, an argument that has become all the more potent in recent years as hedge funds and other active money managers have underperformed the major investment indexes.

In 2014 SEANC announced that it had hired Edward (Ted) Siedle — a pension investigator who has emerged as an ally of union groups in their fight against alternative investments and a thorn in the side of elected officials who choose to make such allocations with their fiduciary pension plans — to conduct an investigation into the teachers’ and state retirement funds in the state system under Cowell.

Siedle’s highly critical report, published in April 2014, found that the fees North Carolina was paying to Wall Street had surged by 1,000 percent since 2000 and accused Cowell of failing to disclose hundreds of millions of dollars in additional fees. Cowell’s administration slammed the report, insisting that all fees are disclosed to the legislature. But this firestorm contributed to the general sense of negativity around such an investment approach heading into the 2016 election season.

In an interview this September with local web site SVL Free News, Folwell pledged that in his first week on the job he would “find out where the pension money is, who is managing it, how good they are it, and how much money are they making doing it.” Now he’s in a position to make good on his promise. Folwell can also be expected to make changes to the pension fund’s investment advisory committee, whose seven current members include Neal Triplett, president of DUMAC, the investment firm that manages Duke University’s endowment.

Among the fund managers that received the most in fees from the state pension system for the 2014–’15 fiscal year, based on Institutional Investor’s review of the latest publicly available data: Angelo, Gordon & Co.; Benefit Street Partners; Blackstone Group; Brigade Capital Management; Brightwood Capital Advisors; Lone Star Funds; Pacific Alternative Asset Management Co.; and Relational Investors (an activist hedge fund firm that closed its doors in 2015). Poor performers included Claren Road Asset Management, Markstone Capital Group, and Relational. It is not clear yet which managers the new regime might seek to cut.

Managers that eventually face the chop, or a renegotiation of terms, under incoming treasurer Folwell probably can’t take comfort in thinking they would have done better under the other guy. Folwell’s opponent, Blue, 43, a former investment banker, argued that the pension plan was paying low fees on a relative basis, but he too vowed to cut costs, increase transparency, and bring more investment functions in-house.

It’s a reflection of the state of U.S. politics today — and the wave of populism that resulted in the election of Donald Trump as president — that the more anti–Wall Street candidate was a Republican who beat a seemingly more progressive Democratic opponent.