Maryland Change

Maryland - Ready For an Investment Change

Maryland Change

No this is not a political campaign slogan, but more of a realization. The Baltimore Sun recently published an article highlighting the recent popularity of passive investing and how some of the biggest Baltimore based money managers are dealing with the situation.

T. Rowe Price and Legg Mason are two well-known investment companies whose primary revenue is based off of actively managed investment strategies. Given the recent rise in passive investing, especially after the most recent financial crisis, they are now looking for new ways to maintain their share of investor assets.

Legg Mason has taken the approach of offering more “exotic” investment options based in the wide world of alternative investments. Terms like “unconstrained bond fund” or “absolute return” are becoming part of the norm in investment strategies, but with little evidence to support their role in an investor’s portfolio.

In fact, the Maryland pension system has called into question their own investment strategy, which has also heavily relied on the alternative investment universe, in attempts to deliver better performance than the overall market. We have been tracking Maryland’s public pension since 1987 in our Pension Gate initiative. Unfortunately, Maryland has been one of the worst performing states in the entire country. The two charts below give a visual indication of Maryland’s performance, among other states, stacked against a handful of IFA Index Portfolios for the 13 year period ending 06/30/2013.

While their performance has been less than stellar, to say the least, their portfolio managers are not complaining a bit. The $45.4 billion retirement system paid a whopping $329 million in fees in 2014.

IFA has obviously applauded the recent rise in passive investing. In 2014, investors pulled $52 billion out of actively managed funds and invested $148 billion into passively managed funds. As of the end of May, investors have pulled $16 billion from actively managed funds and invested $94 billion into passively managed funds this year.

Although the flows into passive investment strategies have been quite impressive, the war will wage on well into the future. The active investment world still makes up the large majority (approximately 85% as reported by the Investment Company Institute) of investors’ portfolios. While investment companies within its borders are going to try to sell more toxic options to investors, Maryland should look to follow California’s lead onto greener pastures.