MEBISODE: Should CalPERS Fire Everyone And Just Buy Some ETFs? | #526

Episode Summary

Executive Summary: The episode argues that large, complex institutional portfolios often add cost and complexity without improving outcomes. Using CalPERS and Bridgewater as case studies, Meb Faber contends that simple ETF-based allocations—such as 60/40 or a global asset allocation portfolio—can match or beat sophisticated private-market and hedge-fund strategies after fees, taxes, and overhead.

Main Topics: CalPERS governance and portfolio complexity (Priority: 5/5): The episode opens with CalPERS as a symbol of institutional complexity: a massive pension fund with frequent CIO turnover, a long policy document, many holdings, and extensive reliance on private funds and consultants. Simple portfolios versus institutional portfolios (Priority: 5/5): CalPERS’ long-run performance is compared with basic benchmarks like 60/40 and a global asset allocation portfolio, arguing that the pension has not meaningfully differentiated itself despite huge effort and expense. Fees, overhead, and wasted effort (Priority: 5/5): A major theme is that staffing, consultants, private fund access, and operational complexity create huge costs that could be avoided with low-cost ETFs and periodic rebalancing. Bridgewater’s all-weather and pure alpha strategies (Priority: 4/5): The show extends the critique beyond CalPERS by testing Bridgewater-style portfolios against simple indexed portfolios, suggesting even elite hedge fund structures can be replicated closely with inexpensive public-market allocations. Risk parity and leverage (Priority: 4/5): The episode explains that portfolios need not hold assets at face value; stocks and bonds can be levered or de-levered to target desired volatility, supporting the case for flexible, rules-based construction. Practical takeaway for individual investors (Priority: 5/5): The episode closes by arguing that most investors should spend less time trying to forecast the next big macro move and more time on a straightforward, low-maintenance allocation.

Key Arguments: CalPERS’ investment structure is excessively complicated and expensive relative to its mission of paying benefits. Despite massive resources, CalPERS does not outperform simple benchmark portfolios over long periods. Private equity and hedge fund allocations impose substantial fees without delivering commensurate outperformance. A global asset allocation portfolio can replicate much of what institutions buy in packaged form, but at far lower cost and with better tax and liquidity characteristics. Bridgewater’s all-weather and pure alpha approaches do not clearly outperform simple public-market allocations on a risk-adjusted basis. If top institutions cannot reliably beat basic ETFs, ordinary investors are unlikely to improve outcomes by overcomplicating their own portfolios. The main value of beta exposure is cheap access; investors should pay very little for market returns and only selectively pay for true alpha.

Data Points: CalPERS assets under management: over $450 billion - Describes the size of the largest U.S. pension fund. CalPERS beneficiaries covered: over 1 million - Public employees, retirees, and their families. CalPERS CIO tenure turnover: roughly one new CIO every other year for the past decade - Highlights governance instability. CalPERS investment policy document length: 118 pages - Used as evidence of complexity. CalPERS investments and funds list length: 286 pages - Shows the breadth and complexity of holdings. CalPERS allocation to public equity: 45% - Part of the stated portfolio mix. CalPERS allocation to private equity: 13.5% - A major source of fees. CalPERS allocation to income assets: 26.5% - Part of the stated portfolio mix. CalPERS allocation to real assets: 15% - Part of the stated portfolio mix. CalPERS allocation to debt: 2.3% - Part of the stated portfolio mix. CalPERS allocation to other trust level: 3.1% - Part of the stated portfolio mix. CalPERS total leverage: about 105% total allocation - Implied by allocations summing to more than 100%. CalPERS venture capital return (2000-2020): 0.49% - Disclosed as a very weak long-term return. Cropland lost to urbanization: approximately 4.8 acres per minute - Used in the ad copy introducing farmland investing. Farmland investment minimum: $15,000 - AcreTrader access point mentioned in sponsor copy. CalPERS comparison period: 1985 to 2022 - Used for the long-run benchmark comparison. Bridgewater comparison period: 1998 to 2022 - Used for all-weather and pure alpha tests. Pure Alpha Sharpe ratio: 0.55 - Reported as the highest among the compared strategies. 60/40 Sharpe ratio: 0.52 - Benchmark comparison. GAA Sharpe ratio: 0.54 - Benchmark comparison. All Weather Sharpe ratio: 0.32 - Bridgewater all-weather comparison. Leverage GAA Sharpe ratio: 0.51 - Benchmark comparison with slight leverage. CalPERS CIO compensation: $1 million in base and bonus - Referenced rhetorically as high compensation for the role. Private equity fee structure: 2 and 20 - Cited as typical institutional fee drag.

Pivotal Quotes: "He was a U.S.-class smooth politician, which is the only way you're going to survive in that job. It has nothing to do with investing." — Institutional Investor description quoted by Meb Faber: Used to frame skepticism about CalPERS CIO politics versus investment skill. "All of it absolutely wasted. Cowpers would have been better off just firing their whole staff, saving the money, and buying some ETFs." — Meb Faber: Central conclusion about institutional complexity versus low-cost indexing. "If the biggest pension fund and the biggest hedge fund cannot outperform basic buy and hold asset allocations, what chance do you have?" — Meb Faber: Summarizes the episode’s broader message for individual investors.

Implications: The episode argues investors should favor low-cost, rules-based ETF portfolios over expensive active, private, or hedge-fund-heavy structures. For institutions, it implies governance simplification and fee discipline may matter more than manager selection.