2.1 The 60-Second Guide to Monitoring Investments

There is a very simple rule to monitoring investments. It is so simple a child could follow it and is easily illustrated by example:

Unfortunately, given this choice, our Trustees have repeatedly chosen investment A, otherwise known as “the horde of expensive Wall Street Firms.” Investment B is an index fund. Another advantage of investment B is that the $10,000,000 you save in fees can be invested and will compound year-over-year. If our Trustees had done that over the past decade, we would have between $150 and $200 million more in our Fund today.

In the Trustee’s current slideshow from the AFM-EPF website, there are six slides which compare the investment performance of the Fund with other funds, with itself in the past and to other funds as done by a third party. In all of these comparisons, the AFM-EPF does quite well. However, the single most common comparison of an investment in all of finance is to the market as a whole. Any financial website will show a chart of how their investment products have done as compared to the broader market.

The Trustees have neglected to provide us with the single most common metric used in all of investment finance. Its absence is surprising. Is it missing because, in fact, the AFM-EPF has failed to “beat the market”?

We provide the missing comparison in Figure 5. This shows how the AFM-EPF investments compare to three different baskets (high, medium and low volatility) of broad-based market funds.

Figure 5: The Missing Slide: Comparing AFM-EPF performance to Index Funds


As you can see, the AFM-EPF does about as well as the market as a whole. Some of the baskets performed better, some worse. The differences are not significant.

Figure 6 is a graph that shows how much we’ve lost over the same period by avoiding index funds and using expensive Wall Street Firms. Let’s call this yet another missing slide.

Figure 6: The Second Missing Slide: How Much We’ve Lost


While it’s true (as the Trustees point out) that some of the Fund investments have done well, it is the overall performance of the Fund that is of interest to participants. To return to our notional car from the previous section: Does it really matter that some of the gas in your car is high-octane if you are never going to get to San Francisco?

The Trustees have also neglected to compare their own investment expense over time. Even though we have less money now, we are paying substantially more to have it managed. Figure 7 shows this in the third “missing” slide.

Figure 7: The Third Missing Slide: AFM-EPF Investment Costs


The outlier in 2008 is not significant and we suggest you ignore it. It was caused by the low net asset values caused by the 2008 crash. Leaving that out, you can see that investment costs have continued to rise. This may explain why it seems that the AFM-EPF is doing less well post-2008 than they were pre-2008. They are simply paying even more than ever.

The Trustees provide endless charts and complicated rationales in FAQ’s for the way they invest our money and to justify their 20+ money managers. We could tediously point out each rationale’s flaws, but why bother when the simplest and best response is just to examine the results? In spite of spending many millions of dollars in search of market-beating performance, the sad reality is that they have completely failed to deliver it. This is fact and not open to debate.

2.1.1 Buffett Weighs In

Warren Buffett also advises pension funds and endowments to move from high priced managers to index funds. We can understand the Trustees ignoring the advice of a few hard working musicians but why ignore a stock tip from the world’s greatest investor? Buffett’s conservative estimate of the amount lost to pension funds and endowments by using high priced money managers instead of index funds is $100 billion.

Here are some excerpts from Buffett’s 2016 letter to Berkshire Hathaway shareholders (emphasis is ours):

“Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S.& P. 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment ‘styles’ or current economic trends make the shift appropriate.

The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.

In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial ‘elites’ — wealthy individuals, pension funds, college endowments and the like — have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is — on an expectancy basis — clearly the best choice.

Much of the financial damage befell pension funds for public employees. Many of these funds are woefully underfunded, in part because they have suffered a double whammy: poor investment performance accompanied by huge fees. The resulting shortfalls in their assets will for decades have to be made up by local taxpayers.

Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something ‘extra’ in investment advice. Those advisers who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicated in an adage: ‘When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.’ ” [2]

2.1.2 Case study: Houghton College

People often ask if it is reasonable for large funds such as pension funds and college endowments to use passive investment? Houghton College tried it last year and came out ahead of all college endowments. The man who manages Houghton College’s endowment is someone who had the intelligence and courage to abandon active management and move to index funds. As reported in the New York Times in February (Endowment Sweepstakes: How Tiny Houghton College Beat Harvard) when other colleges lost around 2% for the difficult 2016 fiscal year, Houghton College gained nearly 3%, a 5% improvement over much better-heeled schools such as Harvard. They also out-performed the AFM-EPF for that period. This is all due to the work of Vincent Morris, who joined Houghton last year. Houghton moved their entire portfolio to a mix of low-cost index and mutual funds at Vanguard.

Perhaps we can find someone like Vincent Morris for the AFM-EPF?