Are Institutional Investors Meeting Their Goals?
Public pension funds and large endowments have been struggling to meet their investment objectives in recent years. Despite allocating a significant portion of their assets to alternative investments, these institutions have underperformed passive index benchmarks since the Global Financial Crisis of 2008.
One reason for these lackluster results is the use of custom benchmarks that do not accurately reflect market exposures and risks over time. By using passively investable benchmarks, institutions can gain a clearer understanding of their performance relative to the broader market.
In this post, we take a closer look at how public pension funds and endowments stack up against their investment goals. For public pension funds, the focus is on meeting actuarial earnings assumptions, while for endowments, the goal is to maintain spending levels in line with inflation. By assessing their performance against these objectives, we can see where these institutions may be falling short.
Meeting Investment Goals Through Smart Choices
When it comes to investment policy, institutions have a choice to make between using index funds for a low-cost, diversified approach or opting for active management in the hopes of outperforming the market. Over the past few decades, many institutions have favored active management, particularly in the realm of alternative assets.
However, as the results show, the active strategy has not always paid off. In the post-GFC era, indexed strategies have often outperformed active approaches, demonstrating the potential benefits of a more passive investment style.
Key Findings and Recommendations
The data analyzed from fiscal year 2008 to 2023 reveals that both public pension funds and endowments have fallen short of their investment objectives. While the indexed strategy has largely met the goals set for public pension funds, it has outpaced the performance of endowments.
By adopting a more passive investment approach and focusing on meeting earnings objectives rather than outperforming benchmarks, institutions can improve their chances of success in the long run. It’s time for institutional investors to let the market work for them and shift away from the costly and often ineffective active management strategies they have relied on in the past.
Final Thoughts
It’s clear that institutional investors need to rethink their investment strategies and focus on meeting their earnings objectives rather than chasing market benchmarks. By making smarter choices and embracing a more passive approach, these institutions can increase their chances of financial success and ensure they are on track to meet their long-term goals.
References:
- Aubry, J.P. 2022. “Public Pension Investment Update: Have Alternatives Helped or Hurt?” (Issue Brief.) Center for Retirement Research, Boston College.
- Ennis, R.M. 2022. “Are Endowment Managers Better Than the Rest?” The Journal of Investing, 31 (6) 7-12.
- Hammond, D. 2020. “A Better Approach to Systematic Outperformance? 58 Years of Endowment Performance.” The Journal of Investing, 29 (5) 6-30.
- Sharpe, W. F. 1988. “Determining a Fund’s Effective Asset Mix.” Investment Management Review (September/October): 16–29.