North Carolina nears one-year standstill on alternatives – exclusive

The $96.1bn pension plan has not made any new real estate, private equity or credit commitments since the start of the year, while seeing a steady exit of investment staff.

North Carolina Retirement System is approaching a one-year absence from new alternatives investing, and meanwhile has been losing investment professionals since state treasurer Dale Folwell took office in January, Private Equity International‘s sister publication PERE has learned.

The pension plan’s last commitments closed in December, according to the NCRS investment advisory committee’s March 29 and August 17 performance reviews. The agenda for its investment advisory committee meeting Thursday did not list any potential commitments.

“NCRS has not made any new commitments to alternatives during this calendar year,” a spokeswoman wrote in an email to PERE. “However, NCRS continues to have a large amount of unfunded commitments – approximately $9 billion as of September 30 – which is drawn down as investments are being made by our external managers in these asset classes.”

The lack of investments was noted in the minutes for NCRS’s March 29 investment advisory committee meeting. At the meeting, John Aneralla, an IAC member, asked then chief investment officer Kevin SigRist about the future use of alternatives. SigRist replied: “We need to continue to see what the Treasurer’s vision will be.” When asked why there had not been any new investments in 2017, SigRist explained that “it is very important that the Treasurer have comfort with the portfolio before he is ready to proceed on any new investments.”

SigRist also added that vintage year diversification was important and that NCRS’s investment management division expressed concerns about being out of the market, but would continue to await Folwell’s approval to proceed on potential investments.

Since taking over as treasurer, Folwell has sought to cut the pension system’s investment management fees by $100 million before the end of his first term, noting in February that NCRS paid more than $500 million in fees to external managers in the last fiscal year.

From NCRS’ August 17 IAC performance review

Under Folwell, the pension plan has increased its allocation to investment grade fixed income and cash, which are managed internally and therefore do not incur external management fees. At the end of the third quarter, the pension system held $28.63 billion in the two investment categories, up from nearly $24 billion at year-end 2016.

Earlier this month, Folwell announced that $100 million in passive indexing funds was being managed in-house to help reduce fees paid to outside managers, with the goal of bringing all $12.5 billion of US passive management assets in-house next year. Estimated annual fee savings from the change will be $2.4 million.

In a statement at the time, the Department of State Treasurer said it had saved more than $60 million in outside investment fees in 2017, with potential savings reaching $250 million over the next four years.

Amid the standstill in alternatives investing, at least eight investment professionals have departed. Most notably, SigRist resigned in June, which Folwell said “surprised” him in a statement at the time. The following month, director of fixed income Jeff Smith and director of risk management and asset allocation Christopher Morris were appointed interim directors of NCRS’ investment management division.

Additionally, nearly all of NCRS’s credit and inflation sensitive portfolio team has departed. Assistant director Kathy Hahn left in May after more than six years at the pension system to become director of investments at Casey Family Programs, while portfolio managers Ryan Hill and John Leraas and analyst Zhexing Zhang have all exited since January, according to their LinkedIn profiles. Only the head of the group, Ronald Funderburk remains to oversee a nearly $12 billion investment portfolio.

Other departures include Arlene Jones McCalla, who was director of investment operations until June and is now senior manager of public markets at the UAW Retiree Medical Benefits Trust, and David Stefanick, an investment analyst.

When asked about filling the vacancies, a spokeswoman said the following: “We are always looking for qualified individuals to assume leadership roles with North Carolina Retirement Systems and the Department of State Treasurer…We will begin the process of replacing personnel in accordance with the needs of the divisions.”

The spokeswoman added that NCRS’s investment management division had an interim CIO for more than nine months in 2009-2010, and again had an interim CIO for more than 10 months from 2012-2013. Prior to 2001, the pension system had no CIO, she said.

NCRS’s assets were valued at $96.1 billion as of September 30, of which $4.89 billion was in private equity; $3.45 billion was in non-core real estate and $4.71 billion was in core real estate; $5.49 billion was in opportunistic fixed income, which includes all non-investment grade credit such as direct lending, distressed, special situations, high yield and credit hedge funds; and $6.43 billion in inflation sensitive assets, which include liquid and illiquid strategies covering timber, agriculture, infrastructure and other real assets, among others.