Active Versus Passive Investment Strategy: Evidence From Public Pension Plans

RM 217

Using a database of the 160 largest U.S. public pension plans over the fifteen year period from 2001 through 2015, we evaluate the Efficient Markets Hypothesis and its implication that it is difficult for active strategies to outperform passive strategies. Specifically, we compare the performance of public pension plans’ active strategies with an estimated, less expensive, passive strategy on an annual basis. Potential passive strategy performance is calculated using a weighted average return. Pension plan provided asset allocations are utilized for weights and the performance of related, common, indexed exchange traded funds (ETFs) are used for returns. In addition, we consider the impact of plan size on performance to evaluate the potential benefit of additional resources. Finally, we illustrate the significant management expenses and fees paid by public pension plans and investigate their relation with pension plans’ performance to evaluate the implication that professional managers are worth their pay because they can “beat the market”