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.
…By this meta-quant-cycle, passive indexed funds would be due to underperform, no? Philadelphia money manager Ted Aronson last winter sent his mailing list a provocative correspondence between investor Jim Grant of Grant's Interest Rate Observer, who predicted index funds generally and especially bond index funds (which, he notes, only sample the all-too-varied bonds available, unlike stock indexes which can own all indexed stocks) are overbought and likely to underperform; with sharp replies from Vanguard Group founder Jack Bogle, who popularized indexing and continues to defend the practice as safest, longest, for most. The two will debate at Grant's investor conference in New York next month.