North Carolina State Treasurer Dale Folwell has taken heat in the past couple of years for what some have said is an overly conservative investment approach. Critics said the pension fund was missing out on a charging bull market when he moved billions of dollars from equities into fixed income.
But Folwell’s slow-and-steady-wins-the-race approach now looks quite prescient amid a global markets crash that shows no signs of abating.
While many of the world’s largest pension funds have been hammered over the past couple of weeks by plummeting global markets, North Carolina’s $105.6 billion state pension fund has fared far better than its peers thanks to the fund’s conservative investing approach.
At the end of last week, when many of the largest pension funds and sovereign wealth funds were down as much as 6%, North Carolina’s state pension fund was down less than 1%. And although the pension fund is now down at least 2.7% as the markets continue to plummet this week due to coronavirus fears and plunging oil prices, the fund is still doing much better than other major institutional investors.
For example, the California Public Employees’ Retirement System (CalPERS) has lost approximately $29 billion, or more than 7% over the past two weeks, with its asset value falling to $370.99 billion as of market close on Wednesday. And the $250 billion California State Teachers’ Retirement System (CalSTRS) said the market downturn “took about 4% off our total return,” according to CIO Chris Ailman—and that was before this week’s market bloodbath.
Norway’s Government Pension Fund Global, which a couple weeks ago reported record 2019 returns of $180 billion, has since lost well over $100 billion, or more than 10% of its value, as the world’s second-largest pension fund’s value fell from $1.07 trillion to $961.4 billion as of Wednesday. According to a report from The Guardian newspaper, UK pension funds lost an estimated 5% to 6% of their value, also before this week. And the S&P is down over 25% over the past month alone as of Wednesday.
In an interview with CIO, Folwell attributed the fund’s ability to withstand the tumbling markets better than others to conservative investing from his investment team and a strong funded position. The state’s Local Governmental Employees’ Retirement System has a funded ratio of 90%, and the Teachers’ and State Employees’ Retirement System has a funded ratio of 86.4%.
“All the credit goes to the team—we have co-CIOs who have between them over 50 years of experience in the business,” Folwell said. “This has been a very conservatively managed plan, and, for the most part, as our equities have declined, our fixed-income portfolio has gone up to offset much of that.”
Over the past couple of years, Folwell has shifted approximately $11 billion worth of equities in the fund to fixed-income investments. And he took a lot of criticism in doing so during a bull market that showed no signs of waning.
In a blog post this past December, Andrew Silton, the former CIO of the North Carolina Retirement System, was critical of Folwell moving the pension fund out of alternative investments.
“While it is certainly appropriate for the treasurer to question the efficacy of alternative investments and engage in a refinement of strategies and the pace of investments, it appears that Treasurer Folwell slammed the brakes on these investment efforts,” Silton wrote. “This is bad news for the pension.”
And in a January 2019 Wall Street Journal commentary, Mene Ukueberuwa wrote that “true to his word, Mr. Folwell halted new investments in private equity and reduced fees by shifting funds into cash and bonds. But by year’s end those savings were dwarfed by the potential earnings the fund missed as the private and public markets surged.”
But Folwell has shrugged off the criticism, saying that the critics only focus on returns, which he said is only one of three main priorities he’s concerned about.
“We have three legs of our pension stool: We got risk, we got return, and we got the ability to fund,” he said. “When you have one of the largest pools of public money in the world that nearly one out of 10 adult North Carolinians are depending on, either now or sometime in the future, you can’t be a gambler, and you can’t profess to have a crystal ball.”
A big reason the North Carolina state pension fund has been able to take a conservative approach is because of its high funded levels. According to Moody’s Investors Service, North Carolina’s Retirement Systems is the best funded in the US in terms of its adjusted net pension liability. And according to The Pew Charitable Trusts, North Carolina “shows especially well” in stress test analysis thanks to a strong funding policy and funding levels.
“The people who teach and the people who protect and otherwise serve our citizens, they don’t wake up thinking about asset allocation models and assumed rates of return,” Folwell said. “They want to make sure that the pension plan that they have worked for for 30 years is going to be there to support them.”
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