Pennsylvania to Move $2.4 Billon in Equity Investments into Passive Investing
Treasurer says the change will save the state $5 million a year in fees.
Pennsylvania Treasurer Joe Torsella is moving all of the treasury’s $2.4 billion public equity investment holdings to a passive investment strategy, which he says will save the state an estimated $5 million a year in fees.
“We shouldn’t treat investing public funds like a casino game, trying to ‘beat’ the market, and paying casino prices to do it,” said Torsella in a statement. “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.”
Torsella said the move will also reduce investment risk and improve return to taxpayers.
“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.”
According to the Pennsylvania state treasurer’s office, the total savings from shifting to passive investments would translate to approximately $195 million when compounded over 20 years.
Torsella instructed the state treasury’s investment team to transition all public stock holdings to passive strategies over the next six months. Approximately $1 billion of the total $2.4 billion equity portfolio is currently actively managed, and will be redirected to lower-cost passive investments.
Torsella cited research by Standard and Poor’s that shows over the most recent 10-year period, more than 87% of all actively managed US stock funds underperformed a broad market index.
“Overwhelming research shows that while some active managers will, of course, manage to outperform the markets in any given period,” said Torsella, “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. And trying to find those managers by looking in the rearview mirror doesn’t help.”