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ND State Treasurer Kelly Schmidt: The Imprudent Investor, Part 2 PDF Print E-mail
Written by Chet   

ShrineI am not a financial advisor. I'm just not. As such, I do not have access to the kinds of tools a financial professional should have available for analyzing investments. That said, because of her track record, I still think North Dakota veterans would be well advised to scrutinize what North Dakota State Treasurer Kelly Schmidt is doing with money the legislature has set aside for some basic services for veterans.  

Last week Wednesday, Kelly Schmidt issued a press release gloating about the return on investment for the Veterans Postwar Trust Fund. She apparently claims "credit" for that return.  Here's part of her press release:

State Treasurer Kelly Schmidt announced the earnings of nearly $576,000 from the Veteran’s Postwar Trust Fund for the 2011-13 biennium.  The Veterans Post War Trust Fund provides income which is used to provide grants and other benefits to North Dakota veterans.

Schmidt Press Release (August 21, 2013) [emphasis added]

I'm not the only one who struggles with math, apparently.  Schmidt screwed up the numbers in that press release.  She issued a second press release the following day, Thursday, last week. Here's what the corrected press release said:

State Treasurer Kelly Schmidt announced the earnings of over $315,000 from the Veteran’s Postwar Trust Fund for the 2011-13 biennium. The Veterans Post War Trust Fund provides income which is used to provide grants and other benefits to North Dakota veterans.

Schmidt Press Release (August 22, 2013) [emphasis added]

Oops. She was only off by a quarter of a million dollars. That's only 5% of the total corpus of the fund. It's just a quarter of a million dollar difference.  What's a quarter mil between friends, right?

Okay, so maybe that's another sign of Schmidt's incompetence. Maybe it isn't. Maybe it was just a typo. $576,000 is right next to $315,000 on my keyboard, too.

But I think there's a bigger question that should come out of this.  Let's talk about that.

According to the press release (and you might want to cross-check this against Schmidt's Veterans Postwar Trust Fund (VPWTF) spreadsheets online (2012) and online (2013) because there seem to be some discrepencies there, too), the starting balance for the fund at the beginning of the biennium was somewhere in the neighborhood of $4,235,000.  

(NOTE:  $4,235,000 is the $4.8 million end balance she talks about, minus $250,000 added by the legislature and $315,000 in earnings from her press release. There are other expenses that should arguably be subtracted out, but I'm going to leave them in. If one of you is smarter than me, you can re-do my math and explain why doing so is more or less fair to readers' search for the truth.)

If my abacus is working correctly $315,000 in earnings on $4,225,000 is roughly a 13.4% return on investment.  If you were to compare the Trust Fund's return to one of the major indexes (Dow, S&P, etc.), I think you'd see that those funds earned closer to 20% during the same period.

DowSP-1

(Source)

Side note:  The Dow gaining 20% in two years is indisputable proof of what Barack Obama is:  Worst. Socialist. Ever.

Let's look at some of Kelly Schmidt's other numbers, too, while we're at it.  Over the two years, Schmidt paid "managed fee expenses" of $60,151.53 ($25,425.02 in 2012 plus $34,726.51 in 2013). That looks like a fee to Kelly's friend, Troy, at the retail brokerage firm -- Edward Jones -- of about 19% of the return on investment (ROI). (I know nobody pays fees based upon the ROI. But, still…) That's an investment management fee of 1.55% of the principal. [Correction: Maybe it's only 1.4%].  I think that’s equal to 1.55 basis points.  [or 1.4].  If memory serves, she (on veterans' behalf) was paying the North Dakota State Investment Board (SIB) .33 basis points when it was managing the VPWTF.  

In fairness to SIB, and in its defense, I should note that Schmidt is also on the SIB, and her investment skills and input have likely impacted their performance, as well. With all her help, the State Investment Board probably isn't doing much better than she's doing.  And they're likely continuing to pay irresponsibly high basis points for the high-risk investments they dabble in.  Keep in mind, too, that auditors have described Schmidt's investment strategies as having "taken on more risk than a prudent investor would be willing to take on."  (Source)  Schmidt's investment performance outcomes should surprise nobody.

Bottom line is this: It appears Kelly Schmidt has smartly invested money for veterans' benefits in a high-risk fund, that's paying 6 or 7 percentage points less than the money would have earned in a conservative index fund, and she's paying nearly FIVE [or four] times more in fees to get that brilliant bargain.

Again, I'd invite someone smarter at this stuff to explain what I'm missing.

If I'm close, Schmidt issued a press release to brag about the return on investment she's helping veterans earn, even though their money would have done significantly better if she'd put it in a conservative index fund or maybe even if she'd left it at SIB.

What am I missing?

It seems like Schmidt's office should be due for another audit report from the State Auditor's Office soon.  Maybe they'll look at this stuff and explain this better. Or maybe they won't.

(Click here for Part 1)


Comments (2)add comment

Jim said:

Better math
Well, I'm an English major, but it seems to me the earnings of $315,000 on $4,235,000 is really a return of about 7 1/2 per cent, or 3 3/4 per cent per year for each year of the biennium. Not 13 per cent.
 
August 28, 2013
Votes: +0

Chet said:

Smartypants
Okay, smart-guy. If you're so smart, tell me how in the hell did I come up with 13%?
 
August 28, 2013
Votes: +0

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