Another Look at Pension-Fund Managers

July 7, 2011

The June edition of the Pulse looked at the characteristics of large pension-fund managers. This was not by chance: PWL has studied their practices for a long time and has implemented, wherever possible, those that made the most sense. We are also on occasion asked to compare our portfolio returns with these managers.

This is a perilous exercise, mainly because big pension managers allocate a considerable amount to private investments. Unlike stocks and bonds, private investments are not actively traded. Therefore, their returns are based on professional assessments rather than market value. Since PWL and pension funds compute their returns differently, it is inaccurate to compare them.

However, we can compare the returns on some of the main index funds used by PWL to the median returns of pension managers (for pooled funds), as published quarterly by consulting firm Aon Hewitt. The results are laid out below:

The above table demonstrates that the index funds available to individual investors often produce similar and sometimes higher returns than the median pension manager. It should also be emphasized that index fund returns are at a disadvantage because they are computed after fees, while pension-manager returns are before fees. The funds showing above-median returns are not the result of a miracle: they are index funds that overweight value and small-cap stocks.

In conclusion, the recent multiplicity of low-cost index funds has allowed individual investors to access institutional-style performance. Not so long ago, these types of funds were available only to institutions with hundreds of millions of dollars to invest. In the last ten years, PWL has contributed to the index revolution, and is constantly scouting for better-performing funds.

The Economic Pulse will take a hiatus next month. We will return in September with new commentaries and analyses. Enjoy the summer!

Raymond Kerzérho

Chairman of the Investment Committee
and Director of Research
PWL Capital Inc.