Who Do the Investments Work For?
Perhaps some people were shocked when Mitt Romney, back in January, revealed that he paid an effective federal tax rate of around 15 percent.
They shouldn't have been. The 15 percent rate on "carried interest" earned by private equity managers has been a political football for a while, with critics arguing it amounts to a needless tax break for the rich and supporters saying it promotes economic activity.
One prominent hedge fund manager went so far as to compare a proposal by Barack Obama to eliminate the tax break to the Nazis' invasion of Poland. (He apparently confused his posh digs in Manhattan with a Warsaw ghetto.)
That's the politics.
In the world of finance, chatter of another kind is taking place.
Increasingly, some observers of the financial world are noting how these tidy sums earned by private equity managers have been possible only because of big institutional investors, mostly private and public pension funds.
These hedge fund and private equity managers typically aren't investing their own money. They are talking the big pension funds into handing over a slice of their pension pies.
If the managers meet earnings targets, they take home 20 percent of the profit. It's that profit that is taxed at 15 percent, rather than the 25 to 35 percent paid by most wage earners.
Just recently, The Wall Street Journal wrote about how the big public-employee pension funds today have 11 percent of their billions invested in private equity. A decade ago, pension funds holding $1 billion or more had just 3 percent of their money in private equity.
One of the biggest pension funds in the country, with around $70 billion, is North Carolina's public-employee pension fund.
Its experience parallels that of the other big pension funds. Under the tenures of former State Treasurer Richard Moore and current State Treasurer Janet Cowell, growing amounts of pension dollars poured into private equity rather than bonds and publicly traded stocks.
There's nothing wrong with that philosophy if it leads to better earnings. It hasn't, though.
Over the last 10 years, returns on the state's private equity holdings trail every other major category of investment.
State legislators, at Cowell's urging, have ramped up the diversification, allowing more private equity investing and direct investing in commodities speculation.
The result? The state's most recent comprehensive financial audit showed about $22 million in losses in wheat, crude oil, corn, natural gas and heating oil futures.
Those commodities investments raise another point being discussed in the financial world: Does big pension fund speculation in commodities, even if accompanied by gains, do more harm than good to pensioners by causing increases in the prices of basic goods needed to live?
Over the long haul, perhaps this -diversification strategy will work for pensioners. Right now, it mostly appears to be working for the Wall Street financial class.
In this election year, Cowell and anyone else seeking her office, along with the state legislators who approved of this strategy, ought to answer hard questions about the current investing course.
Scott Mooneyham writes for Capitol Press Association in Raleigh. Contact him at firstname.lastname@example.org.
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