San Diego Pension Urged Go Passive and Save on Fees

Why pay for active when passive can work just as well? That was the message the California pension fund's board got from its strategist Salient Partners at the latest meeting.

(February 25, 2013) – The San Diego County Employees Retirement Association (SDCERA) can boost net returns by swapping some hedge fund holdings for passive index funds, Salient Partners urged during the most recent investment meeting. 

Salient serves as the fund’s portfolio strategist, and CIO Lee Partridge, joined by quant Roberto Croce, spent a portion of the two-hour-long education session pitching passive as an asset management strategy. 

“A lot of hedge funds in general are just a compensation scheme,” said Roberto Croce, director of quantitative research for the Houston-based asset management firm, to SDCERA’s board. Croce was speaking in reference to the fund’s approach to trend-based strategies, which exploit factors like momentum to glean profit off of popular assets. 

Many hedge funds offer access to these strategies, but as Croce said in answer to a board member’s question, the hedge fund path has a downside: “It’s really the fees. Fees, fees, fees. Fees have a very high Sharpe ratio: they are guaranteed. They [hedge funds] are not going to miss any charges. Really, what we wanted to demonstrate here is that a very simple, plain vanilla implementation has a relatively large margin.” 

Croce and Partridge do have skin in the game: the passive strategy in their comparisons was Salient’s own Pure Trend Index, held against Barclay’s BTOP50 Index and an overall CTA index. 

However, going passive in certain pockets of one’s portfolio can be an excellent way to boost net returns, a top Mercer consultant recently told aiCIO. Brian Birnbaum, a Chicago-based partner at the firm, stressed that fees can make all the difference in whether a strategy is profitable or not. 

As a consultant, Birnbaum said, “what you want to avoid is having clients buy and pay multiple active manager fees to get exposure or access certain markets. You can do the same thing with index funds.”