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CalPers And The Case For Passive Investing

I hope investors everywhere take note that CalPers, California's state employee pension, is thinking about increasing the amount of its huge $256 billion portfolio that it invests passively.

They probably will notice because, after all, CalPers is the world's biggest public employee pension plan, and as Rick Ferri, the well-known champion of passive investing, said to me recently:"When CalPers speaks, people listen."

It's no secret that it already passively invests a bit more than a third, or about $90 billion, of its huge portfolio. But it only uses passive strategies on the public equity allocation of its portfolio.

It's interesting that CalPers' 35 percent passive allocation just about matches the percentage of institutional money that, in the aggregate, in passively invested. Maybe we should watch the relationship of those two numbers closely to gauge CalPers' influence.

What's been in the news in recent months is that CalPers is open to raising the passive portion of its public equity portfolio above the current level of 67 percent as part of an "Investment Beliefs" vote its 13-member board will take in September.

That public equity portion of its overall portfolio is now about 52 percent of the whole, meaning that even in the unlikely event that CalPers decides to invest all of its public equity portfolio passively, there's no way its passive allocation could get much above half of the whole, which would be about $130 billion.

You can't blame a die-hard indexer like me for wishing on behalf of all of California's public employees that CalPers does decide to invest as much passively as it can, and here's why.

I'll start with a timely piece of news today from CalPers itself :The huge fund returned 12.5 percent in the fiscal year ended June 30­­­­—more than the 7.5 percent long-term return it needs to maintain to meet current and future obligations, though less than the 20 percent return of the S'P 500 ETF (SPY) in the same period.

What's interesting is that the public equity portion of the portfolio—again, the piece that's 67 percent passively invested—returned 19 percent, easily beating all other slivers of CalPers' portfolio. Look for yourself:


(Fiscal Year
Ended June 30)

Public Equity


Private Equity


Fixed Income


Real Estate




Inflation Assets


Absolute Return Strategies


I'm going to go out on a limb and say it's the passive piece that made the public equity sliver the top performer at CalPers in the past year, and that helped it nearly match the S'P 500.

At the risk of getting snarky, I'd even bet the active piece of that public equity sliver was probably behind the underperformance to the S'P 500.


Because that's what the numbers tell us. Passive investing is cheaper than paying for an active manager, and the performance of the typical active fund isn't as good as a comparable passive one.

That's exactly what one of CalPers' consultants told the board at a meeting earlier this year; namely, that in any given year, most active managers—about two-thirds—will underperform their benchmarks.

We write about this performance gap twice a year when the SPIVA report comes out, and it's great that an influential fund like CalPers is actually listening to what the data say.

It takes courage and sobriety, given all the lies about active management that stalwart advocates of passive investing like Larry Swedroe never cease to remind us about.

It gets even more damning for active managers when you look at the passive versus active question from the perspective of entire portfolios, as Rick Ferri has discovered in the past year. He's published a white paper about his findings. As for me, I'll circle back to that subject in another blog.

But for now, the point is this:Investors everywhere will benefit as influential investors like CalPers embrace passive investing more deeply, even if I harbor a sense that perhaps the world's biggest public employee pension fund hasn't yet gone far enough.

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