Dallas Morning News
August 15, 2020

Serving up a scorecard of the best - and worst - managed of the state's public pension funds.

Texas has 99 public pension funds. All are managed by professionals. Those professionals are devoted to providing superior management, and they are paid well to do it.

Very well.

Yet over the last 10-year reporting periods, only three of the 96 pension funds with 10-year performance figures managed to beat the Vanguard Balanced Index mutual fund (Admiral shares). So about 3% of professional managers did better than a passive index. The other 93 pensions trailed the index fund by amounts that range from a modest 0.08% annualized to a whopping 6.33%, annualized.

How could this happen?

The Vanguard fund is about as pure vanilla as you can get. It invests only in domestic stocks (60%) and domestic bonds (40%). It invests in the total U.S. stock market and the total U.S. bond market.

While managed funds have small armies of certified financial analysts and MBAs sift through mountains of data, make projections and build models of future revenue and earnings, this fund is sublimely indifferent to all attempts at reading entrails.

The greatest virtue of the fund is its radically low expenses. They are now down to only 0.07% a year. This is a fraction of what it costs to manage pension funds in Texas or anywhere else in the country.

Now check out the list at the bottom of this column. It shows, in rank order, the 10-year return of each pension fund relative to the Vanguard Balanced Index fund. The best performers are at the top. If you are a public employee in Texas, your pension is on this list.

The three best-performing funds — the ones that actually beat the Vanguard index fund — are:

• Retirement Plan for Anson General Hospital.
• Dallas Employees’ Retirement Fund.
• Retirement Plan for Guadalupe Regional Medical Center.

At the bottom end of the table, the Lower Colorado River Authority Retirement Plan hit a 10-year return drought, ranking 96th. Only slightly better, three Dallas plans compete with the Lower Colorado River Authority for worst performance. Perhaps the Dallas County Hospital District Retirement Income Plan, Dallas Police & Fire Pension System-Combined Plan and the Dallas Police & Fire Pension System-Supplemental should call the Dallas Employees Retirement fund and ask for some pointers.

The Teacher Retirement System pension, the largest fund by far, ranked 15th of 96, trailing the index fund by 0.51% annualized. Some would say this isn’t as mediocre as it looks. They may be right.

Why? Because the index fund often beats competing managed balanced mutual funds by a much larger margin.

The Employees Retirement System of Texas, the second-largest pension fund in the state, ranked 39th, trailing the index fund by 1.59% annualized.

For the entire group, Texas public pension funds trailed the index fund by an average of 2.14%, annualized and by a median of 1.98% annualized.

Are you grinding your teeth? Are you thinking this is unusual, terrible and scandalous?

If so, you’re partly wrong.

It isn’t unusual.

If you go to the Morningstar website and click on the page for Vanguard Balanced Index mutual fund and examine the 10-year performance figure, you’ll see that the fund beat the 414 managed funds it competes with by 2.13%, annualized over the last 10 years.

It’s a different 10 years, but the margin of superiority is the same as the average for all the Texas public pension funds. The index fund scored in the top 10%, or better, over the last one, three, five- and 10-year periods.

So it’s not unusual. It’s absolutely common.

But it is terrible and scandalous.

It’s terrible that the billions of dollars in funds for future retirees isn’t returning more.

It’s scandalous. At this time 45 years ago, Charles Ellis’ landmark article “The Loser’s Game” was published in the Financial Analysts Journal. Professionals pay attention to this journal.

In it, Ellis pointed out that professional investors, not the proverbial “little guy,” were now “the market” and therefore could not beat it. Earlier research suggested the same conclusion. And it has been confirmed, year after year after year, by a regular report from Standard & Poor’s measuring the performance of mutual funds against their chosen benchmarks.

Today, more than half a century of data and research has shown that high-cost professional management can’t earn its keep. In spite of this, the folks who oversee this vast sea of Other People’s Money — public pensions in Texas and around the country — continue to make a sucker bet.