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  • Iowa Public Employees Retirement System IPERS Debate - Part 4 - Bill Toohey, IPERS Retiree
  • Tracy Freese
  • Finance
Iowa Public Employees Retirement System IPERS Debate - Part 4 - Bill Toohey, IPERS Retiree


I want to thank you for encouraging IPERS to stop wasting money and increasing risk by hiring outside active investment managers in an effort to "beat the market". You are doing a great service by bringing this to the attention of IPERS members and the public.

I am a retired State of Iowa employee. I also receive IPERS benefits, so I support IPERS, and I have a very strong interest in seeing them succeed. Like you, I delved into personal finance long ago. After being identified as one of the best personal finance managers in America by Money Magazine many years ago, I was invited by Money to write an article for the magazine. I also participated on a panel with Money's Executive Editor. My wife and I wrote a book 15 years ago that was published & promoted by John Wiley & Sons in hardcover. Wiley also picked up the paperback rights. A publisher in China purchased the international rights to the book and it was published there (in Mandarin) by the Shanghai People's Press. We have done many personal appearances, TV interviews, and radio interviews throughout the US and Canada, and were featured in a number of magazines and newspapers (Money, McCall's, Woman's Day, Financial Planning, Minneapolis Star Tribune & many others). I was also registered with the SEC as an investment adviser for awhile, primarily to cover myself when doing public appearances. After a couple of years we tired of frequent public appearances and went back to living a more "normal" life. I was offered employment as an advisor with a major insurance company that would have tripled my salary, but I had no interest in selling financial products I would not buy myself, so I continued my work with the State of Iowa helping people with disabilities. I never made big money, but my work was worthwhile, and by utilizing investment and personal finance knowledge I was able to retire early (at age 52) and pursue other interests after working for the State of Iowa for 28 years. The point is, I generally immersed myself in the world of investing and personal finance, and I think I can say that I have a pretty good understanding of the issues you are addressing. 

I believe that you are completely correct in your assessment of IPERS' overuse of active management. It's a difficult concept to get across because it is counter-intuitive, but most  investors who truly know what they are doing generally try to avoid actively managed investments, choosing instead to build a portfolio of mostly passive investments by purchasing shares of funds that track various indexes consistent with the chosen asset allocation (such as the S&P 500, Barclays U.S. Bond Index, and many others). IPERS has chosen to hire active investment managers to manage most of their assets. This involves employing various strategies that have been largely discredited in an effort to beat the market, such as market timing, predicting which stocks will do well over the short-term, etc. Experienced investors almost always choose to avoid this approach, but this is a fairly typical amateur mistake, and one I made myself when I was just getting started. Many books and scholarly articles
have been written on this subject, so it's not possible to cover it in detail here, but I'll try to hit a couple of the main problems with IPERS' active management approach:

Hiring outside active managers costs a great deal of money. IPERS admits to spending massive amounts each year to pay "experts" to try to beat the market utilizing long discredited practices such as market timing, trying to predict which securities will do well and which won't, etc. This approach almost never succeeds for individual investors over the long term, and it is particularly treacherous for large institutional investors such as IPERS. They should be investing primarily in securities that track appropriate indexes instead of trying to "beat the market". This would reduce costs significantly while also assuring that exposure to the unnecessary risk of under-performing the market is either eliminated or greatly reduced for IPERS members.

Over long periods most active investment managers under-perform the market, and sometimes they under-perform spectacularly. The problem is, it is not possible to know in advance which managers will beat the market over the short/intermediate term, which will lag, and which will fail in a big way. There is simply no way to know this in advance. In fact, it has been demonstrated over and over again that the performance differences among active managers is largely a matter of chance. It is a common rookie mistake to examine the past returns of various investment managers and select the manager who has managed to "beat the market" for, say, the past 3, 5, or 10 years. It is now widely known in investment circles that past performance is NOT an indicator of future performance. These things are actually counter-intuitive. One would assume that hiring an "expert" to pick and choose which securities to buy (and when to buy and sell them) could only increase returns, and one would also presume that the guy who has beat the market over the past 10 years will continue to do so.

Sadly, this is simply not the case, and there are many very good reasons why this is so. The thing is, active investment managers are actually very bad at beating the market over the long term. It's not that they're incompetent, it's that their task is almost impossible to accomplish over the long haul. Furthermore, unscrupulous active managers, in an effort to attract more investors, have been known to exploit those who lack investment knowledge by touting good past returns and inferring that market-beating past returns are good predictors of market-beating future returns, when this simply is not true. So I was very surprised to see IPERS employ that tactic in public statements. It strikes me as unseemly. As a strong IPERS supporter, I do not want to see the long-standing good reputation of IPERS sullied. It is precisely this type of thing that contributes to the miserable reputation of the financial services industry in general, and I would hope that IPERS would hold its organization to a much higher standard.

--- By relying so extensively on active managers, IPERS is choosing to play a zero-sum game with their members' money, and by that I mean that there must be a loser for every winner. IOW, for every person who beats the market, there must be another who loses. But it is only those who choose to play this game, as IPERS is doing, who are exposed to this risk. The problem is, one's odds of winning at this game plummet as time progresses. Why? Because of the drag of the extra management expenses and because it is extremely difficult to beat the market year, after year, after year. The investment manager must not only beat the market, he must beat the market by:

  1. Enough to cover the difference between what the customer would pay for passive investments (a fraction of the cost) and what they are paying for access to the manager's crystal ball, and
  2. Enough to reward his investors for taking the extra risk, because if you aren't rewarded over time for taking the extra risk, why would you take it?

As time marches on this becomes progressively more difficult to do. Eventually it becomes virtually impossible. This especially applies to organizations like IPERS because they have such a long time horizon - probably much longer than any human lifetime. The longer the time-frame, the greater the odds of losing at this game. So paying for so much active management can truly be viewed as speculating with IPERS' assets. They may win at this game for awhile, but they WILL lose over time. Furthermore, it is well within the realm of possibility to lose big unless all of their investment managers as a group are largely replicating the market as a whole, but if that's the case why pay for active management? So I would prefer that IPERS stop playing this loser's game with IPERS assets. With passive investments there are no losers relative to the market. All investors receive market returns as replicated by the fund, minus minimal investment costs. This is what most knowledgeable investors choose.

Just a few years ago IPERS invested with Westridge Capital Management. Westridge was operated by crooks who had been looting customer assets for years. At the time I can recall thinking that anybody who knew what they were doing wouldn't have touched such a sketchy outfit with a ten-foot pole. Yet IPERS entrusted hundreds of millions to these clowns. The point I'm making is this: IPERS claims to be able to identify which managers will beat the market. But how can this be true if they can't even discern whether a manager is an outright con-man? The truth is, they can't. Nobody can. Nothing demonstrates this better than the fiasco IPERS got themselves into with Westridge Capital Management. I would think that the shame of that debacle would have moved IPERS toward a more passive investment approach. Apparently it hasn't. As members we need to pay closer attention.

I see in IPERS' public statements that their talking points frequently include a declaration that there is an "ongoing debate" about active vs. passive management. This is nonsense and it strikes me as disingenuous. There is no such debate among those who know what they are doing; that ship sailed long ago. To suggest that there is still an ongoing debate would get one laughed out of any forum comprised of veteran investors. The thing is, it is no longer the 1950s, and fiduciaries who fail to keep up with current best practices would seem to be standing on very shaky ground. IPERS may even be opening themselves up to the potential for future liability for failing to meet fiduciary obligations. It would appear that IPERS is in need of an infusion of fresh ideas. Ingrained habits, old methods, and comfortable practices are hard to change; I understand that. But there are more important things at stake here than the comfort level of IPERS' investment staff.

I think that this entire matter could be reduced to these two questions: 

  1. Is IPERS willing to assure its members that IPERS staff are able to know, in advance, which managers will beat the market after costs?
  2. Are the folks at IPERS who insist on sticking with outdated and discredited strategies willing to accept personal financial responsibility if they fail over time?

If the answers to these two questions are "no", it seems to me that they should stop taking unnecessary risks with IPERS members' assets. It's one thing to participate in a loser's game with your own money, but quite another to do so with other people's money. It's also notable that IPERS has recently ceased paying favorable experience dividends, nor are they fully funded. They are in no position, therefore, to be throwing money away on active managers in an effort to play a game that is virtually guaranteed to lose over the long haul. A long-term investment strategy should not resort to chasing short-term gains.

I also want to point out that the Member Services side of IPERS does an outstanding job. I have never encountered a more well-run, efficient, competent, customer friendly organization than the Member Services side of IPERS. They are truly amazing. So IPERS does some things extremely well, as evidenced by their excellent Member Services. They deserve kudos for that.

It is the investment side of IPERS that appears to be in need of closer supervision and scrutiny, which brings me to another issue... I appreciate you sharing the communication you received from a State Legislator who serves on the IPERS Investment Board. I won't mention any names, but I found that correspondence to be appalling. One would expect at least a modicum of professionalism from someone on the IPERS Investment Board. I was truly expecting to read a calm, rational, well-reasoned response to your concerns. What I saw was disgraceful. The anger, hostility, and outright meanness in that communication was entirely inconsistent with the bland and rather academic subject matter, while also reflecting a rather amateurish understanding of these issues. As an IPERS retiree and beneficiary, I've got to tell you that this was unsettling. It causes me to question what is going on behind the scenes at IPERS, and who the people really are who manage IPERS investments.

Like many IPERS retirees, I have coasted along presuming that the people making the IPERS investment decisions possess the necessary temperament to be relied upon to act reasonably, rationally, calmly, and professionally when acting in their official capacity as Investment Board members. But that's not what I saw in that correspondence, and it causes me to question whether the investment side of IPERS has gone completely off the rails. Is there anyone there with a strong enough hand to guide that ship, or is this type of emotionalism and bullying behavior the norm at IPERS? This is important because, as you know, Mike, it takes a cool, unemotional, and very rational mindset to succeed in investing. It also takes a willingness to learn, and to admit mistakes, and to change course on the basis of new information or changed circumstances. As you and I both know, over-the-top emotional reactions and arrogance are the ultimate undoing of many investors; it's a poisonous mix and can lead to great investment losses. So I've got to say that in addition to everything else, reading that correspondence greatly undermined my confidence in the investment side of IPERS.

So Mike, like you I have no hidden agenda and no axe to grind with IPERS. I'm just a regular guy and an IPERS member who wants to see IPERS be the very best it can be. Although you and I have never met, I support what you are saying, and I would encourage all IPERS members, IPERS investment staff, IPERS Investment Board members, legislators, reporters, and the general public to listen carefully to what you are saying. Being right is a very powerful thing, Mike, and you are absolutely right here.  As an IPERS member, I stand with you and call on IPERS to change course.

Thanks Mike.

Bill Toohey
IPERS Member

  • Tracy Freese
  • Finance