Ms. Creswell described how South Carolina hired a man named Bob Borden to act as chief investment officer for its retirement system pension plan.
Borden started his job in 2006, and immediately set to work to transform the conservatively run plan into something more in tune with the latest thoughts from Wall Street.
Here's how the trade publication Pension & Investment Age described the changes at at the end of last year:
When Robert L. Borden became the CIO of the South Carolina Retirement System Investment Commission in 2006, the fund had 52.6% in domestic equities, 46.6% in fixed income and 0.8% in cash. For the five-year period ended March 31, 2006, the fund returned 20 basis points above its policy benchmark. During his tenure, Mr. Borden transformed the asset allocation.
The equity component now represents a world opportunity set with 15.6% in domestic equities, 8.4% in developed international equities and 8.1% in emerging markets equities as of June 30. The fund also has substantial exposure to alternative investments with 28.7% in opportunistic credit, hedge funds, private equity, commodities and real estate. For the five years ended June 30, the fund outperformed its policy benchmark by 83 basis points. Only time will tell if Mr. Borden's changes will benefit participants over the long term.
Think of it: the Fund was invested roughly 50/50 between stocks and bonds when Borden started. Boring, yes, but very effective. Had he kept this allocation, the fund would have grown by nearly +15% for the 5 years ending December 31, 2011, despite the horrific bear market of 2008.
But that's not what Mr. Borden did, as P&I wrote. And yesterday's New York Times piece suggests that the only ones that truly benefited from the asset allocation changes were Borden and the managers of the alternative investment choices.
Here's what Julie Creswell wrote:
What is sure is that while he was running things, South Carolina ended up paying hundreds of millions of dollars in fees — $344 million last year alone — to a Who’s Who of hedge fund managers and private equity deal makers. In return, it got a trove of investments that haven’t really provided the bang that people here had hoped for. Today, the pension fund has a higher share riding on private-equity and hedge-fund plays — called “alternative investments” in some circles — than almost any other state’s: $13 billion, or more than half its total.
According to the article, the year prior to Mr. Borden's arrival, South Carolina paid $22 million to the managers of its $24.5 billion investment fund - a fraction of the $344 million it now pays.
The additional fees that it paid managers of alternative investments would total roughly $1.5 billion over 5 years, or about 6% of the value of the fund. And so far at least South Carolina has very little to show for it.
Borden, meanwhile, was earning nearly $500,000 a year for his leadership, and is now - surprise, surprise - working for a private investment company.
Eventually, of course, if the changes in asset allocation that Borden implemented do not pan out, South Carolina taxpayers will wind up picking up the tab.
I hope the Times article gets the attention of taxpayers everywhere.