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A Review of the Florida Retirement System

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Two reporters from the Tampa Bay Times asked me for information about the performance of index funds compared to actively managed funds used by Florida's state pension plan. Here is the article they wrote.

Florida's pension fund, in my opinion, has provided further evidence of the failure of active management. All the time and money spent by Florida on the selection and termination of investment managers has resulted in returns below IFA's selected benchmark returns. Consultants for the plan have established benchmarks that I would call a low bar for managers to beat; when managers beat easy benchmarks everybody looks good. I have concluded that the plan needs a more sophisticated set of benchmarks to demonstrate that active management has had a negative impact. This could have cost the public employees billions of dollars in lost opportunity costs.

In reviewing the Florida State Retirement Plan, two periods were analyzed. First, the previous 10 years were compared to 5 index portfolios from Dimensional Fund Advisors, Vanguard and a set of benchmarks. As shown below, an index portfolio with 65% Equities and 35% Bonds from Dimensional Funds and 70% Equities and 30% Bonds from Vanguard Funds had about the same risk, as measured by the 10 year standard deviation calculated from annual returns.

As of Dec. 31, 2010, the Florida Retirement System's ending value was $124.2 Billion. With an ending value of $124.2 Billion and an annualized net return of 4.6% over the last 10 years, an initial balance 10 years ago of $79.2 Billion would grow to the current value. If that $79.2 Billion had been invested in an index portfolio of 65% Equity and 35% Bonds from Dimensional Fund Advisors (see Figure 6) with first of the year annual rebalancing, the ending value would have been $165.4 Billion based on a 7.64% annual net return. This would have been an estimated $41.2 Billion short fall of the ending value for the Florida Retirement System as of Dec. 31, 2010.

Further analysis was completed and the data and benchmarks are shown in the figures below. 

Figure 1

See Figure 6 for allocation details.

 

Figure 2

 

Figure 3

Figure 4

Figure 5

Figure 6

The second time period reviewed was the 26 year period ending Dec 31, 2010.

Figure 7

Figure 8

Figure 9

Figure 10



To review several articles on this topic, please see: 

Pension-Gate: Some Good News from CalPERS

Pension-Gate: The Repercussions of CalPERS' Hedge Fund Decision

Pension-Gate Continues: Some Good Advice for the Hawkeye State

Pension-Gate - Good News from Pennsylvania

Pension-Gate Continues: North Carolina is on Notice

Pension-Gate: CalPERS Performance for the Fiscal Year Ending 6/30/2013

Pension-Gate Continues - Maryland has been Called Out

Pension-Gate: More Smart Advice from Maryland

Active vs. Passive — A Look at Pensions in the U.K.

A Summary of the 2005 SEC Study of Pension Consultants

Do Investment Consultants Add Value?