| ACTIVE VS. PASSIVE MANAGEMENT
One Pension Fund Looks At The Last 22 Years |
I recently had the privilege analyzing a city pension fund. This pension fund has been actively managed by an international money manager for over 22 years. The firm is well known...you would probably recognize them. The analysis was performed to answer the question...is the active management of the pension fund adding value? I went about answering that question using the pension fund's real historical data.
I obtained the quarterly cash flows in and out of the pension fund since inception (the pension had always been managed by the same company). I performed 2 hypothetical analyses for comparison. First, keeping the same equity/bond allocation used by the active manager, I replaced the equity portion of the fund with the S&P 500 index returns and the bond portion with the US aggregate bond index returns. For the second analysis, instead of using the S&P 500, I replaced the equity portion with our diversified equities approach with a tilt toward small cap value that we use in your portfolios.
The result.. had the pension fund invested in an S&P 500 index vs. paying this well known active management firm, the pension fund would have been over $26 million instead of the current $18 million.
Secondly, had the pension fund tilted the equity portfolio toward small cap and value like we do with your portfolios, the pension fund would have been $41 million instead of $18 million.
It was interesting to note when looking at the data, that there were several quarters (approximately 40%) when the active manager outperformed the passive approach. In one 4 year stretch, the active manager outperformed the passive approach 12 out of the 16 quarters. What does that mean?
It means that investing is a long-term process. You will have short-term periods and what may seem like a long-term period where your results appear less than active managers. Four years is considered short term in an investment time frame but is a long time to hold on to an approach that seems to be subpar. So when you sit with your buddies and compare quarterly investment returns, be prepared to lose that bet 40% of the time...sometimes for an extended stretch of time. That said, which would you rather have in your pension fund...$18 million or $41 million?
While I was a believer in passive management before, I'm even more so now having gone through this exercise. We value your trust and information like this helps keep us focused knowing that our approach with your investment portfolios reaps measurable results in the long run.
Please note the indecies used in the analyses are unmanaged measures of various markets. Investors cannot invest directly in an index. Past performance is not a guarantee of future results.
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Our objective is to design portfolios using passive asset class funds that maximize investors' returns within their tolerance for risk. Here is what sets us apart:
- Fee-only investment management
- A disciplined investment strategy
- Access to institutional no-load passive asset class funds
- An academic Nobel Prize winning investment approach
- Continued access to academic research
- A tax-efficient focus with valuable tax and estate planning ideas
- Risk tolerance assessment
- Periodic portfolio rebalancing
- Regular communications and state of the art reporting
- No front-end or back-end loads, no surrender fees, not locked in
- Most important...A TRUSTED ADVISOR RELATIONSHIP
We thank you for your trust. Please don't keep us a secret with your family and friends. Introductions and referrals are always appreciated. Wealth Management, LLC, a Registered Investment Advisor, is affiliated with Breneman & Company, PC and offers wealth management and investment advisory services. Wealth Management, LLC is a Nebraska limited liability company.
Sincerely,
 Corey D. Breneman, CPA/PFS Investment Advisor Representative Wealth Management, LLC |
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A couple weeks ago I had a client cancel a phone meeting because he had taken his son to the ER. Later I emailed him asking how his son was doing. Below was his response with names changed.
On Sept 1st, Joe was having severe pain in his legs. We tried everything to relieve the pain, but it only got worse. That night, we rushed him to the ER. They ran some tests and informed us that it appeared that Joe had Leukemia.
The next morning, a cancer doctor confirmed it was Acute Leukemia.
Within 24 hrs, they did many tests and determined the type of Leukemia. By midnight on Sept 3rd, they began giving him heavy doses of chemotherapy. The doctors said that Joe would be in the hospital for four to six weeks to get this round of chemotherapy and be watched closely. They said he would then go home for a few days after the first round, but we should expect to repeat this scenario quite a bit for the next six months.
As you can imagine, we prayed non-stop during this time. Joe was very positive and had total assurance in his heart that God would heal him and work super naturally.
On Sept 8th, just five days after Joe had entered SLU, the doctor came in and told us that he could not find any more Leukemia cells in Joe's blood samples. He seemed very excited. He wanted to perform another "bone marrow biopsy" to see if there was Leukemia still in his bone marrow.
Well, the news continued to get better as the days passed. On Sept 13th, Joe's doctor decided that there was no point keeping him in the hospital. So today, Sept 14th, he sent Joe home. Joe is scheduled to go back on Fri. Sept 17th, for another "bone marrow biopsy".
Obviously, we are believing that he will find no more Leukemia in Joe's bone marrow.
The doctor has told Joe that he will continue to get chemotherapy, on an outpatient basis, for a while, and that he will need to take an oral chemotherapy pill for the rest of his life; but we have faith that the doctors will soon realize that Joe is healed and does not need ongoing chemotherapy.
Joe is at home, eating like a horse, and praising God! (and so are we...)
The bone marrow biopsy showed no signs of cancer. We share the joy of this family's gratitude to God. The article to the left may make you a believer in the passive investment approach, but this hits home to what are true treasures in life...family and a God who is in control of all things.
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