C&B Notes

Pension Manager Myopia

Moving away from what is out of favor and embracing only what has worked well lately is a recipe for buying more-expensive financial assets.  This behavior is driven by a herd mentality (safety in numbers!), a fear of being left out (career risk avoidance!), and recency bias (what have you done for me lately!?!).  One of the biggest advantages indefinite-life investors like pension managers often forfeit is the ability to think about results over full cycles rather than year-to-year.

Funds have poured into private equity and other so-called alternative investments.  They have assembled portfolios that are way too complex, way too dependent on supposedly sophisticated (and high fee) investment vehicles.  They have chased what is fashionable, they have overly diversified, and they have abandoned what should be their true calling: patient long-term investing in American corporations.

Public pensions are in a heap of trouble; according to recent figures (courtesy of Standard & Poor’s) their assets are 29% less than needed to pay future obligations to retired teachers, firefighters, and the like.  And while ordinary investors have seen their returns from the U.S. stock market soar since 2009, pension funds have largely missed the rally…

It’s true that the stock market doesn’t always go up.  But a long-term investor shouldn’t be wary of volatility.  Over the long term, American stocks do go up.  And state pension systems should be the ultimate long-term investors; their horizon is effectively forever.  Lower volatility helps fund managers; they don’t like having to explain what happened in a bad year. But it is not good for their constituents.

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Consultants who advise public pensions thrive on making investing seem complex — that’s what keeps them in business.  But excepting for a very few people with uncommon abilities, investing is done best when done simply.  With their close ties to Wall Street, pension managers tend to be steeped in the arcane culture of the market.  The web site for the Teacher Retirement System of Texas refers to its “headlight system” of “portfolio alerts” and the outlook for the U.S. Federal Reserve and China.  Managers who think in such episodic terms tend to be traders, not investors. This subverts the long-term goals of retirees.