State Treasurer Joe Torsella Monday announced he will transition all of Treasury's $2.4 billion public equity investment holdings to a passive investment strategy, saving an estimated $5 million per year in fees-- approximately $195 million in total savings when compounded over twenty years.
Torsella said the move will reduce investment risk and improve return to taxpayers, by eliminating high management fees paid to outside firms that frequently underperform the market. The move also takes another step toward changing the pay to play culture that has plagued the Commonwealth for decades.
"I took an oath to put the public's interests first, not Wall Street's," Torsella said. "Study after study has shown that a passive investment approach for stocks, by dramatically reducing the costs to taxpayers, has a high likelihood of performing much better than a high-fee active investment approach over the long term."
Torsella directed Treasury's investment team to transition all public stock holdings to passive strategies over the next six months, joining growing numbers of investors embracing passive investing as smarter fiduciary management. Approximately $1 billion of the total $2.4 billion equity portfolio is currently actively managed, and will be redirected to lower-cost passive investments.
The move comes just months after Torsella banned the use of placement agents in all Treasury investment contracts on his first day in office. Placement agents have been at the heart of scandals involving past state treasurers, and are still in use in some areas of state investment that Treasury does not directly oversee.
Passive, or index-style, investments buy and hold all the stocks in a fund that mirrors a market index such as the Standard & Poor's 500 or the Russell 3000.
With extremely low fees, investors get better returns than they would from funds with similar holdings but higher management fees and transaction costs, which act a drag on investment performance.
In recent years, passive investing has become the "strategy of choice" and continues to grow, according to the Wharton School of Business.
"Overwhelming research shows that while some active managers will of course manage to outperform the markets in any given period, it is both extremely difficult for a manager to do so consistently over time, and extremely difficult for investors to identify which managers will outperform in the future," Torsella said. "And trying to find those managers by looking in the rearview mirror doesn't help."
"We shouldn't treat investing public funds like a casino game, trying to 'beat' the market, and paying casino prices to do it. Instead, we should capture the underlying market return at the lowest possible cost. The broad strategic allocation of investment funds is the single most important decision for any investment portfolio. We can't control investment performance or consistently beat the market, but the one variable we can control is costs – and I have a fiduciary obligation to taxpayers to do so."
Comprehensive research by Standard and Poor's shows that in most cases, active managers are unable to pick enough winners to justify their fees: over the most recent ten-year period, 87.47 percent of all actively managed US stock funds underperformed a broad market index. In that same ten-year period, a majority of all international stock funds also underperformed.
Legendary investor Warren E. Buffet recently urged investors to adopt passive strategies, calculating that pension funds, endowments and wealthy individuals have paid over $100 billion in the last decade to hedge funds and other money managers that charge sky-high fees for sub-par performance.
As Buffett wrote: "The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds".
For a copy of a PA Treasury Passive Investment Guide is available online.
Gov. Tom Wolf applauded Torsella’s move to passive investment saying, “The Commonwealth cannot afford to pay excessive fees to investment managers, and I applaud Treasurer Torsella efforts to move toward passive management. Treasurer Torsella’s actions will save money and provide an important blueprint for efforts to cut out investment managers and save Pennsylvania money.”
NewsClips:
PA State Treasurer Plans Big Change For Investing $1 Billion In State Assets
AP: State Treasurer Says He’s Moving $1 Billion To Passive Investments
State Treasurer Hopes To Say $5M In Fees On New Investment Strategy
AP: State Treasurer Says He’s Moving $1 Billion To Passive Investments
