My much-commented-on Sunday Inquirer column about active stock-picking and private investment management funds vs. passive index-fund investing at Pennsylvania's public pension systems brought this comment from reader and investment pro Lou Mosca: "You want to bet the pension plans switch to more-passive, just when active goes through a period of outperformance? This is always the case with investors, big and small: You zig when you should zag."
Mosca's not wrong, so far. Consider:
- In the 1960s the U.S. stock market shot up. In the 70s, state pension plans, which used to focus on tax-exempt bonds, got permission to buy stocks -- which promptly tanked.
- In the 1970s real estate outperformed. In the 80s state and big city pension plans bought real estate -- and got clobbered in the S&L blow-up.
- In the 1980s venture capital made Ivy League endowments (except Penn's) rich. In the 90s, state and big city pension plans bought v.c. (Philly with borrowed money), jammed $100 billion into a sub-$10-billion/year tech venture market -- and got killed in the dot.com blow-up.
- In the 1990s private equity enriched cutting-edge endowment funds and private investors. In the 2000s state and big city pension funds bought private equity -- which stalled when the stock market dried up.
- In the early 2000s, hedge funds outperformed, and everyone in finance wanted to be a hedge fund manager. State and city pension funds started loading up on hedge funds -- which failed to resist the 2008 financial crisis and have since underperformed.