What Investment Returns Can $200 Billion Buy?

The last siren call of investment managers is an appeal to your ego.  This is how it goes:

“Yes, we know most managers fail miserably to outperform the market after they pay themselves hefty fees, but those guys are for the small accounts. You have a million dollars! This will get you access to the next level of managers.  The really good ones.”

Or: “Oh, of course, accounts below a million dollars are better off investing in asset classes, but you have 5 million dollars! We have proprietary research just for you.  Our investments trounce the market.”

Or: “Well sure, if you only had $5 million it might make sense to keep expenses low. But you have 10 million dollars! You can pay for our quantitative algorithm that picks the best stocks based on how loud Jim Cramer yells the ticker symbol.”

Joking aside.  The trend is clear and you can see the allure.  At every wealth level it seems you have just enough to get you access to the real managers.  So how do you know how much you really need to get the best managers?  Maybe there is a way to find out.  Maybe there is an investor out there so large that they trump every other investor and truly have access to the very best managers.  And maybe this investor makes their returns public so you can see exactly how well their access to the “best” managers turned out for them.

As it turns out this investor does exist.  The California Public Employees’ Retirement System (CalPERS) is the largest public pension fund in the US with over $200 Billion in assets under management.  That’s right.  Billion with a “B.”  Pensions have been on the forefront of alternative investments for some time now.  CalPERS began investing in hedge funds in 2002.  They even developed a database of “emerging” managers to aid institutional investors in tracking down the next undiscovered Warren Buffet.  CalPERS not only invests in hedge funds, they even have enough clout to actually hire hedge fund managers to work directly for them.

If anyone has the ability to pick the absolute best investment managers it is the California Public Employees’ Retirement System.  So what kind of returns can $200 Billion buy?  Turns out not so good.  A recent WSJ article (which can be read here) reported on CalPERS’ pretty poor 1 year performance ending this June.  The fund reported a 1% return compared to the Dow Jones return of 3.8%.  Not terribly below the market.  And one year returns can be pretty volatile anyway, right?  This is true, but unfortunately for CalPERs it doesn’t get any better over longer time periods.  Below is a comparison of the 10-year return of the CalPERs pension plan verse a basic global passive 70/30 allocation (approximately the allocation of the plan).

 

So what did access to the best managers in the world give them?  It looks like about the market rate of return MINUS fees.

Is this a shock to you?  It should not be if you ever read the Legacy blog.  It simply affirms what academic research and empirical data continues to prove.  The key to a successful investment experience comes from controlling costs, controlling risk, and controlling your asset allocation.  Paying for performance and chasing returns is a sure fire way to have a very unpleasant experience.

So the next time that advisor starts to whisper sweet-nothings in your ear and he tells you of the great investments available just for you. STOP. And think twice before being seduced.  If $200 Billion buys you sub-market performance, what do you think he is trying to sell to you?