Tuesday, December 29, 2020

"ESG Causes Pension Strategies to Underperform"

One of the points we've attempted to make over the years is that when you run into a RIA or fund manager who advocates both passive index investing and ESG they are more than likely just another Wall Street marketeer. ESG is by definition active.

From ValueWalk, December 25:

Pension investment strategies have been coming up short for years as most states watch their unfunded liabilities grow. One study shows that actively managed public pensions have been underperforming passive index funds, which further demonstrates everything that’s wrong with most pension investment strategies.

A new study looks at the best and worst-performing state pensions and their investment strategies compared to passive funds.

Pensions would do better if invested in passive funds

In a study published in August 2019, the Institute for Pension Fund Integrity reported that just five of the 52 pension funds it analyzed outperformed their 60/40 passive index investment portfolio. Only one state had both strong pension performance and was well funded.

The institute used the Vanguard Total Stock Market Index and the Vanguard Total Bond Market Index to build two passive index portfolios to compare state pensions to. One of the portfolios was 60% stocks and 40% bonds, while the other was 50% stocks and 50% bonds.

Now in a newer study, the Institute for Pension Fund Integrity looked at the investment strategies of the top and bottom performing funds compared to the passive portfolios it had created.

Differences between the best and worst pensions

Interestingly, asset allocation didn't differ drastically among the top and bottom performing funds, which means other aspects are causing problems for the worst funds. The IPFI said global and domestic equity was on average the biggest part of pensions' portfolios. The distribution of those assets among the top and bottom five funds was almost identical.

South Dakota consistently outperformed pensions in other states, both against the 60/40 passive fund strategy and in its funding ratio. According to the IPFI, the state's "commendable prioritization of benchmarks and fiduciary responsibilities exemplify the values of a successful pension."....


Even worse than the duplicity of the RIA's is the fact that the public union pension plans have explicit taxpayer responsibility to make up any shortfall when the activist pension fund (looking at you, CalPERS) falls short of their mandatory return levels.

It's one thing to virtue signal with your own money but to do it with the taxpayer's money is perverse and perverted.

Another point we've been making for a while. Because there are so few actual "E" stocks, portfolios end up being stuffed with the more nebulous "S and G" stocks.

This means you end up with a lot of Google "carbon neutral since 2007" and other tech stocks.

Fine and dandy when the market is manic for tech but a guaranteed relative, if not absolute, loser if, as seems possible right now the herd moves on to Emerging, or Value or Small Cap or any factor other than large-cap growth.

Finally, solely as an example of the above, here are the largest holdings of the $2.62 billion Vanguard ESG U.S. Stock ETF (ESGV)

Top 10 Holdings (26.36% of Total Assets)

NameSymbol% Assets
Apple IncAAPL6.29%
Microsoft CorpMSFT5.25%
Amazon.com IncAMZN4.39%
Facebook Inc AFB2.18%
Alphabet Inc Class CGOOG2.03%
Alphabet Inc AGOOGL1.41%
Tesla IncTSLA1.37%
JPMorgan Chase & CoJPM1.17%
Visa Inc Class AV1.16%
Procter & Gamble CoPG1.11%