Dallas Morning News Editorial
August 27, 2020

Couch Potato Investors Do Better Than Texas Pension Managers

What if you could do almost nothing at your job and still outperform 97% of your co-workers

Had you managed a Texas pension fund for the past decade and placed the money into a low-cost index fund, closed the computer and called it a job well done, you would have.

In case you missed it, financial columnist Scott Burns has been crunching the numbers and discovered that, over the past decade, just 3% of Texas pension funds beat the low-fee, do-nothing Vanguard Balanced Index in returns.

Note, as Burns does, that pension fund managers and advisers are paid handsomely in salary and fees to beat the market — and the money they are paid is coming from public employees and taxpayers.

But they don’t beat it. Instead, the market consistently beats them and is likely to continue beating them over time.

The under performance of public pension funds is nothing new, of course. Beginning in 2015, Dallas was stuck in a nightmare over its Police and Fire Pension fund thanks to the terrible mismanagement under its prior administrator, a person who had a taste for speculating in; Hawaiian villas;and fields of dreams in Idaho. We were only lucky the fund wasn’t offered a chance at ocean-front property in Arizona.

The fund has stabilized under its current leadership and after the state Legislature intervened. But it, like too many other Texas pension funds, isn’t realizing the investment returns that set-it-and-forget-it investors are.

This isn’t unique to pension funds, as Burns reports. Low-fee index funds consistently beat managed funds in the broader market.

For Dallas, there is a silver lining in this. Of the three funds Burns highlighted, one of those that did manage to outperform the market — albeit by the slimmest of margins — was the Dallas Employees’ Retirement Fund. That fund has been a bright spot for the city under the longtime management of executive director Cheryl Alston, who prefers a relatively conservative portfolio of stocks and bonds.

The performance of index funds versus pension funds in general begs the question — why chase higher returns when you can sit back with low-fees and vastly improve your odds?

Well, just like in the regular market, certain pension advisers have higher risk/reward tolerance, even if the odds are that most of them will realize the risk and not the reward.

And for some pension fund managers, there is almost a necessity to take greater risk because their underfunded pensions can’t keep up with the future payments they will have to make at average market returns. And they certainly can’t weather an extended down market. So managers have to chase riskier ventures with their funds. That’s a very bad scenario to be in. But it’s a reality for too many public pensions.

Beyond that, managers have a responsibility to hedge against the market. But a good index fund or a mix of funds can offer such a hedge.

So-called sophisticated investing with high-fee managers and hopes of big returns aren’t getting the job done for Texas pensions. It’s time for taxpayers to ask what they are getting for their money.