Tuesday, July 19, 2016

Public Pension Funds Post Ridiculous Results

From July 1, 2015 to June 30, 2016, the S&P500 gained slightly under 4 percent.  The most widely used measure of fixed income returns, the Barclays Aggregate was up 6 percent.  The most widely used asset allocation until the last two decades was 70 percent S&P500 and 30 percent Barclays (in those days, Lehman) Aggregate.  This allocation would have produced 4.6 percent returns through simple zero cost indexing.

To achieve this almost five percent return for the period July 1, 2015 to June 30, 2016 would have cost nothing.  One simple phone call to Vanguard would have done the trick.  No need for investment committees, highly paid investment staff, nothing. 

Meanwhile, the fees paid to Wall Street are completely absurd.  CALPERS, the large California public pension fund, paid over $ 1 billion in fees in each of the past ten years.  How about Virginia?  Virginia paid over $ 300 million annually on average to Wall Street over the past ten years.

So, what did these public pension funds, with all their high powered  (mostly political) trustees and investment committees and fees get for their money?  This past year is instructive.  CALPERS, produced a 0.6 percent return for the year ended June 30, 2016 (that's their fiscal year) and VRS, the Virginia public pension fund beat CALPERS by clocking in at 1.5 percent.  [Hedge funds should consider shorting the CALPERS or VRS portfolios and going long the S&P500.  They would have been consistent winners, year after year, over a very long period of time]

It is hard to imagine how they could do as badly as these funds did, but this is just one more year in a string of years over the past two decades with results that are not only terrible, but absurd.  These results are hard to believe.  How did they manage to find investments that performed this poorly?  Maybe that's what they had to spend the fees on: searching for losers.  Unfortunately, they found them.

A back of the envelope calculation shows that CALPERS poor investment performance over the past two decades has cost the state of California taxpayers over $ 200 billion, while VRS has cost the taxpayers of Virginia over $ 40 billion.

This is how government manages your money.  Pretty hard to believe, but true.

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