A consultant hired by the State Employees Association of North Carolina has accused the state Treasurer’s office of paying “over-the-top fees,” including “massive hidden fees,” to money managers who invest the state’s $86 billion pension fund.
The Treasurer’s office, which has repeatedly clashed with SEANC, counters that the consultant’s conclusions are based on assumptions that “are not based on conventional industry standards.”
The state’s fees are in line with what other state pension funds pay, and its fee-disclosure policy also is on par with industry norms, spokesman Schorr Johnson said. Johnson also said that the fees the state paid jumped significantly last year because of fees based on performance; since the pension fund performed much better, its fees rose.
Chapel Hill investment firm Franklin Street Partners also has been drawn into the controversy, which erupted last week when Florida-based consultant Edward “Ted” Siedle wrote state Treasurer Janet Cowell complaining that the department hasn’t provided fee information SEANC requested.
“Indeed, it appears that the massive hidden fees you have failed to disclose dwarf the excessive fees you have disclosed to us,” Siedle wrote.
He also criticized Cowell in an online column he writes for Forbes magazine, which included some of the same language found in his letter. The column, which made it clear he has been hired by SEANC, noted that the Treasurer’s office’s disclosed fees amounted to “a staggering $416 million last year,” up from $121 million a year earlier.
The state pension fund, one of the nation’s largest, provides retirement benefits for more than 875,000 North Carolinians.
SEANC, which has advocated for the state pension fund to be managed by an investment board rather than the state treasurer, announced in January that is paying Siedle $65,000 to examine state pension investments for fees, conflicts of interest and “potential violations of federal securities law.” Siedle expects to finish his examination in a matter of weeks.
Last year, Siedle issued a scathing report of the state employees pension fund in Rhode Island. The state’s treasurer told the Providence Journal it was “a political attack paid for by opponents of pension reform.”
Siedle cited Franklin Street Partners as Exhibit A in support of his contention that the Treasurer’s office isn’t forthcoming about the fees it pays.
He wrote that documents provided by the state show that Franklin Street received $2.6 million in fees for the 2012-13 fiscal year for managing $360 million in assets. Of those fees, $1.8 million was pegged to the amount managed, or asset-based fees; the other $800,000 was in incentive, or performance, fees.
However, Siedle noted, Franklin Street acts as a “fund of funds” that hires hedge funds to manage the state’s money. “It appears that you are not disclosing the significant fees paid to the underlying hedge fund managers actually managing the money,” he wrote.
Assuming that those hedge funds receive a 2 percent asset-based fee and a 20 percent incentive fee, Siedle calculated that would amount to $10.4 million in additional fees last year.
“Since it appears that Franklin has managed this account for approximately 12 years, the undisclosed asset management fees paid to this single manager appear to exceed $120 million,” Siedle wrote Cowell.
Siedle also contended that “it appears” that Franklin Street may receive an estimated $3 million annually in additional fees for commissions earned from handling trades for the hedge funds it hired.
Franklin claims ‘false statements’
Franklin Street issued a statement Tuesday contending that Siedle “made several false and misleading statements related to FSP.”
Although Franklin Street does have a broker-dealer affiliate, it doesn’t handle trades on behalf of the hedge funds it hires, the company said.
Franklin Street also stressed that any fees charged by the hedge funds it hires go to those funds alone; Franklin Street doesn’t share in those fees.
“Mr. Siedle implies that FSP was paid ‘undisclosed’ management fees that ‘appear’ to exceed $120 million over 12 years. This is false,” the company said. “Mr. Siedle appears to erroneously combine a false estimate of fees paid to FSP with a gross estimate of fees paid to underlying managers hired and attribute the total sum of all fees to FSP.”
Johnston, the spokesman for the Treasurer’s office, said the $120 million fee figure is wrong.
“The assumptions used to reach that number are not based on conventional industry standards,” he said.
Andrew Silton, a former chief investment officer for the pension fund and a former consultant to Franklin Street Partners, agreed there are fees that aren’t being disclosed but disagrees on the magnitude and says “there is nothing nefarious about it.”
Silton, who also writes a twice-monthly column for The News & Observer, said in an interview that he reviewed the documents supplied to Siedle and concluded that Siedle is significantly overstating the fees earned by the hedge funds hired by Franklin Street.
Siedle’s calculations assume that all of the hedge funds hired by Franklin Street earned their performance fees each and every year, Silton said. But that notion is undercut by the fact that Franklin Street only received its performance fee in five of the eight years between 2006 and 2013. That’s an indication that the hedge funds it hired, as a group, didn’t perform so well.
“Thus, there’s no way Mr. Siedle’s estimate is anywhere close to reality,” he wrote.
More data sought
Silton also contended that Siedle’s assumption of the fees earned by the hedge funds hired by Franklin Street – a 2 percent asset-based fee and a 20 percent incentive fee – is too high. But Ross Gerber, president and CEO of Gerber Kawasaki Wealth and Investment Management in Santa Monica, Calif., said the 2-and-20 fee structure “seems to be the standard.”
Ardis Watkins, SEANC’s legislative affairs director, said Silton’s past history with Franklin Street discredits his comments.
“It’s impossible to give Andy Silton any credibility in this situation,” she said.
Silton said he’s dealing in facts, not opinions.
Siedle said in an interview that if the state treasurer’s office wants to disprove his analysis, it should disclose all the fee data that SEANC has requested.
SEANC and Siedle said it’s irrelevant whether the state’s fee disclosures are on par with other pension funds.
“It’s like I tell my kids,” Watkins said, “just because the other kids are doing it doesn’t make it right.”
“The bottom line is, people need to know what the fees are,” Siedle said. He added that, based on what he knows today, the amount of “hidden fees” that the state pays annually is “probably ... well over $200 million.”
Johnson disputed that and said that the state is still working on providing the documents SEANC presented. But he couldn’t say whether the state will disclose the fees paid to hedge funds selected by “funds of funds” such as Franklin Street.
“I don’t know the answer to that because it’s an ongoing records request,” he said. “We’ve provided several thousands of pages of documents so far. We will give them everything they have requested that is a matter of public record.”
Johnson said that last year, the state hired a firm, Hewitt EnnisKnupp, to examine the fees it pays.
“They found them to be reasonable and at or below industry norms,” he said. “Part of what they examined are the fund of fund fees.”
That said, Johnson added that the pension fund is cutting back on funds of funds because higher fees are involved.
Last year, the state’s fees totaled $416 million, or 0.52 percent of the total fund, up from $295.7 million a year earlier as incentive fees more than tripled based on improved performance.
“Spending one-half percent in fees and getting a 12.28 percent return for the whole fund is a return we are proud of,” Johnson said. The fund’s returns, he added, are calculated after deducting fees and expenses.
Johnson also said that the pension fund would like to handle more of its investments in-house to reduce fees, but in each of the past two years, it failed to win the legislature’s approval to hire the additional staff it would need.
The pension fund intends to renew that request this year, he said.
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