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Largest Pension Fund Considers Exiting Active Investments

It is a commonly held belief that the more money you have, the more exotic your investment strategy should be. The story goes, all the best money managers have significant account minimums which is why only the wealthiest individuals or largest institutions have access to them. Unfortunately, there is no data that can back up this assertion and it seems like the investment community is finally catching on. The $255 billion California Public Employee's Retirement System (CalPERS), one of the largest institutional investors in the world, is considering whether to completely abandon active managers in their portfolio. Here is an excerpt from the Investment News article:

Over the past 10 years, just 38% of large-cap-equity managers have beaten the S&P 500. Over five years, it shrinks to 31%, and over three years, it is just 18%, according to Morningstar Inc. Making things even harder for those trying to pick active managers is that just 9% of large-cap managers outperformed the S&P 500 over all three time spans. The inconsistency of actively managed returns is what prompted the review by CalPERS. As P&I reported: "CalPERS investment consultant Allan Emkin told the investment committee that at any given time, around a quarter of external managers will be outperforming their benchmarks, but he said the question is whether those managers that are doing well are canceled out by other managers that are underperforming."

The only surprising fact about this article is that it took this long for CalPERS to consider making this change. The data is overwhelming and the risk of underperformance is just too great to try to hire managers that outperform. CapPERS spends millions of dollars per year hiring consultants and researching this topic. For those of you who are implementing an active strategy (either on your own or through outside managers), the question you need to ask your self is whether you will have more success than they do trying to find the next hot manager.