Opinion: Big pension funds ditched the bad stuff last year – business as usual

Well, the geniuses who run the best pension funds in the world have done it again.

Once again, they’ve managed to avoid investing in things they should have invested in, while investing in things they shouldn’t have invested in – with the all-too-predictable outcome that the idea you really wanted to hear a year ago was this isn’t a list of the experts’ biggest picks for 2021, but their biggest pans.

Luckily (author’s note: It’s not really luck, just the weary cynicism of someone who has been following these people for…a…very…long…time…) you got that help here at MarketWatch, a year ago — just when you needed it.

And we don’t even charge you 2% of your assets per year. What a story!

According to the industry’s most watched survey, a year ago the world’s top institutional fund managers avoided seven “asset classes” or types of investments. They thought these offered the highest risk, the worst rewards, or both.

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These were, in no particular order, “cash” (i.e. Treasury bills and short-term deposits), bonds and stocks of so-called “consumer staples” companies such as than, for example, Walmart WMT,
-1.20%
or Procter & Gamble PG,
-0.50%,
energy companies, real estate investment trusts and companies listed on the major overseas markets of London and Tokyo

They were their most hated assets, and luckily any idiot could invest in all of them through a low-cost exchange-traded fund.

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So how did they do it? Overall, according to our figures, a portfolio evenly split between these seven investments managed to produce a return of 14.7% for 2021 – quite a remarkable achievement, especially since most of these assets generally present a fairly low risk.

To put that into context, a “global benchmark” portfolio of 60% global stocks and 40% global bonds, represented by the Vanguard Total World Stock VT,
+0.13%
and Total World Bond BNDW,
-0.52%
ETF, would have gained only 10.1%.

In other words, the investments big fund managers hated the most beat the pants of a country-mile global index portfolio.

These numbers are based on someone using global investment funds – for example, investing in global bonds or global consumer staples stocks, rather than those focused solely on the US

If we instead focused on the US and replaced Vanguard’s BND US bond ETF,
-0.54%
for global bond fund BNDW, and US consumer staples, REITs and energy ETFs for their global equivalents, the simple portfolio of “most hated” assets soared 18.2% last year – nearly 4 percentage points ahead of a portfolio made up of 60% US stocks and 40% US bonds.

In other words, whether you use a global or US benchmark, the result is the same: the smart decision a year ago was to find out which assets professional fund managers hated the most and buy them. .

(Yes, sure, there were individual stocks and things like cryptocurrencies that did much better still. But you’re talking about a different level of risk. It might as well point out that everyone has under -performed racehorse Rombauer, who won the Preakness 11-1 last year, and You’ve Got To Be Kidding, who won at England’s Cheltenham 80-1.)

How did the pension fund managers themselves do it? Individual fund data will inevitably be released in arrears, if at all. But here’s what we do know: Some will have beaten the index. Most won’t. It’s a rule of thumb in finance that on average these guys underperform the indices they track – not only because they tend to sell their REITs and big oil stocks just before they go up, but because the MBA and CFA certified geniuses they hire to do those smart moves cost a lot of money in the first place.

So the investments that smart guys avoided at this time last year ended up doing worse than a basic balanced portfolio of stocks and bonds, which in turn ended up doing better than most guys smart.

Do you follow this?

Incidentally, these guys’ favorite global pick a year ago was Emerging Markets. Surveys have shown that large institutional investors started 2021 betting heavily on emerging markets, at the expense of developed markets like the United States.

Net profit? Emerging markets, followed for example by the iShares Emerging Markets ETF EEM,
+0.13%,
ended the year down 4%, losing money as the rest of the world boomed and the worst performer of any major region.

Truly, no price is too high to pay for this kind of genius.

There are reasons for this. These fund managers all receive the same financial education, leading them to draw similar conclusions about investment options. So they all tend to invest in much the same way. Meanwhile, they’re managing so much money that they can’t beat the market because in a way, they’re the market. So by the time they’ve all, for example, decided that big oil stocks are doomed and dumped them, stock prices are already at rock bottom.

I’m waiting for someone to start Pariah Capital, a hedge fund that makes its money simply by investing in what the big-money crowd shy away from. Do you think I’m kidding?

The next step is to find out where the geniuses are betting their long-suffering investors’ money for 2022. Stay tuned.