Big state pension funds spend many millions of dollars a year hiring sophisticated advisers to bet on arcane strategies in hopes of boosting long-term profit and protecting them from market downturns.
In two Pennsylvania counties, local investment boards embrace an index-only strategy
Small pension funds found bigger returns by cutting out professional money managers and advisers.
By Joseph N. DiStefano
Over time, returns have lagged.
A couple of Pennsylvania counties have found a simpler, better way, says Jim McMillin, elected controller of Butler County from 1994 to 2014, and an architect of that county's pension investment strategy, which relies mostly on low-fee investments based on stock and bond indexes.
Butler was "the first county in Pennsylvania to go fully indexed," McMillin recalls. "We cut our fees by over $1 million annually, lowered our fund's overall risk, and routinely outperformed the great majority of actively managed funds."
Montgomery County made a similar switch starting in 2013, a break so decisive the county doesn't report its profits from before that date.
McMillin points out that the largest Pennsylvania pension fund, PSERS, which currently invests $73 billion for half a million working and retired public school employees, would have raised an extra $4 billion plus over the past 10 years if it had invested like Butler County (and that's based on a conservative average of $50 billion for PSERS assets in those years).
Butler's financial reports show it averaged 8.08% annual returns in that decade while PSERS — the Public School Employees' Retirement System — averaged 8.0%, a small difference that adds up mightily over time.
Last year, as stocks rebounded from pandemic lows, PSERS returned 24.6%, breaking its own record. But Butler posted 26.8%, more than 2 percentage points higher.
Montgomery County, which shifted to low-fee index funds starting in 2013, returned 26.5%, according to data from Montgomery's chief financial officer Dean J. Dortone.
After the stock market briefly lost nearly half its value in late 2008, PSERS cut its U.S. stock holdings and invested more in private funds.
That's when the Butler County pension board asked its hired money managers to disclose more clearly their investment results, after deducting their fees, for every quarter.
The pension trustees compared those results to broad stock and bond indexes like the S&P 500. Ultimately the board put all the fund's $200 million in assets into index funds.
"It became apparent we were getting beat up with fees, and paying for active management that was underperforming," McMillin said.
The Butler County pension board kept about 10% of its money in one last, local stock-picking firm, McMillin said. That firm's returns consistently underperformed stock indexes, and was terminated last year.
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Joseph N. DiStefano
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