CALPERS Has Underperformed a 60/40 Index Fund by 50bps per annum – For the Last 40 Years
Think about that. Nearly forty years of returns below what could have been achieved for almost nothing and lower volatility. But instead the ~$450B California state pension fund has missed out on tens of billions of “lost” earnings as a result of underperforming a US 60/40 index fund — while on top of that essentially wasting every penny ever spent on investment staff and consultants to source, diligence, and invest in active and alternative managers. For 40 years!
This mind-blowing fact is from Meb Faber’s blog, highlighted in John Auther’s column, as shown in the top chart. Faber writes that he keeps volunteering to manage CalPERS for free but they keep turning him down. Think again CALPERS!
This adds to the accumulating evidence that US institutional asset owners in aggregate are pursuing a strategy which — though it may make sense for a handful of institutions — is crazy when EVERYONE TRIES TO DO THE SAME THING. The bottom chart shows the glaring underperformance of US endowments (of all sizes) over the 13 years ended June 2021 versus a passive investible benchmark with the same risk in a recent paper by Richard Ennis. It’s a painful message for institutional CIOs: For most they would have been better off not doing ANY manager selection and not investing ANY in buyouts, VC, or hedge funds but instead putting it all in ETFs.
There ARE exceptional managers. There IS NOT an infinite or even large supply of them! Layer on exorbitant costs and it’s impossible for the industry in aggregate to match a liquid passive portfolio. The godfather of the endowment model himself, David Swenson, in his magnum opus, Pioneering Portfolio Management, got at this very issue:
“Active management strategies demand uninstitutional behavior from institutions, creating a paradox that few can unravel. Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.”
Yet how many endowments are following Swenson’s advice?
How many are doing the opposite — maintaining portfolios which are “comfortably consensus” — virtually identical to everyone else?
The big winners of the takeover of institutional asset management by the Endowment Model are active managers and especially alts managers — and the Wall Street firms that cater to them. Never in human history have so many people made so much money without doing anything particularly useful. In time, the last 20 years will be seen as a massive transfer of wealth from institutional asset owners to Wall Street.