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How Florida pension plan investments stack up to index funds

The St. Petersburg Times wanted to check out how effectively the State Board of Administration invests the retirement savings of city, county and state employees. Taxpayers across Florida help fund the system.

So we did a little experiment. We asked financial professionals what would have happened to $100 in a portfolio of index funds that required no Wall Street wizards to oversee them. We also looked at index fund portfolios developed by two Ivy League professors. Index funds are simple investments that are content to do precisely as well as the markets do, and no better. Some are riskier than others, depending on the market they track.

Then we compared how those funds would have performed with the returns the investment gurus at the SBA got.

Here are the results. The links take you to each fund, so you can learn about it and its holdings.

* * *

One of our contributors looked at how the SBA did over the long haul -- from July 1, 1984 through June 30, 2011. His analysis:

FLORIDA
$100 invested in Florida pension fund grew to $1,291
(9.57 percent return)

STEVEN POMERANTZ
$100 invested in Pomerantz' portfolio grew to $1,367
(9.79 percent return)

Steven Pomerantz is an investment management consultant in Princeton, N.J. With a doctorate in math from the University of California at Berkeley and more than 20 years of experience in investment research, financial modeling and derivative structuring, Pomerantz consults with banks and investment firms in portfolio and risk management and government agencies on economic and tax-related issues. He has testified as an expert witness on a variety of topics, including cases involving mutual fund fees.

Portfolio consists of 31 percent in Vanguard Total Bond Market Index Fund (VBMFX) and 69 percent in Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). Pomerantz' performance analysis is based on the Vanguard funds' returns from shortly after their inception (1987 and 1992). For earlier years, he estimated performance figures based on actual index returns less .2 percent.

* * *

We also compared financial professionals' portfolios to the results the SBA got from Jan. 1, 2001 through Dec. 31, 2010.

FLORIDA
$100 invested in Florida's pension fund grew to $157
(4.6 percent)

CHARLES FISHER and MARTIN SOLOMON
$100 invested in the portfolio created by Fisher and Solomon of Tampa grew to $172
(5.58 percent return)

Charles H. Fisher Jr. and Martin B. Solomon are founding shareholders of Reilly, Fisher & Solomon, a Tampa accounting firm specializing in tax and investment advice for high net-worth individuals and private companies.

Portfolio consists of 30 percent in Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX); 40 percent in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX); 20 percent in Vanguard Total International Stock Index Fund Investor Shares (VGTSX); and 10 percent in Vanguard REIT Index Fund Admiral Shares (VGSLX). Some funds are for admiral-shares investors with what had been $100,000 minimums, though Vanguard recently lowered that to $10,000. For two funds that came into existence in 2001, VBTLX and VGSLX, Fisher and Solomon based performance figures on then-existing Vanguard bond and real estate funds less expenses to match the newer funds.

RICK FERRI
$100 invested in Ferri's portfolio grew to $164
(5.06 percent)

Richard "Rick" A. Ferri, founded Portfolio Solutions, a Troy, Mich.-based investment company. He is the author of six books on investing. He specializes in low-cost index funds and writes for Forbes.

Portfolio consists of 25 percent in Vanguard Total Bond Market Index Fund (VBMFX); 45 percent in Vanguard Total Stock Market Index Fund Investor Shares (VTSMX); 23 percent in Vanguard Total International Stock Index Fund Investor Shares (VGTSX); and 7 percent in Vanguard REIT Index Fund Investor Shares (VGSIX).

CAROLYN HILL
$100 invested in Hill's portfolio could have grown to $162
(4.92 percent)

Carolyn Hill is a specialist in exchange traded funds at IndexUniverse, an independent authority on index-based investing and trading. She graduated from Claremont McKenna College with a dual degree in economics and government.

Portfolio consists of four exchange-traded funds that came on the market last decade: 40 percent in Vanguard Total Stock Market ETF (VTI); 20 percent in Vanguard MSCI EAFE (Europe Pacific) ETF (VEA); 10 percent in Vanguard MSCI Emerging Markets ETF (VWO); and 30 percent in Vanguard Total Bond Market ETF (BND).

To produce performance results, Hill used the returns of the ETF's underlying indexes. The launch of ETFs has made it cheaper and easier for any ordinary investor to track these indexes going forward.

BURTON MALKIEL
$100 in Malkiel's portfolio grew to $205
(7.44 percent)

Burton Malkiel is an economist, Princeton professor and author of the best-selling finance book A Random Walk Down Wall Street. Malkiel is famous for his remark that monkeys can pick stocks better than experts.

Portfolio consists of 33 percent in Vanguard Total Bond Market Index Investor Shares (VBMFX); 27 percent in Vanguard Total Stock Market Index Fund Investor Shares (VTSMX); 14 percent in Vanguard Developed Markets Index Fund Investor Shares (VDMIX); 14 percent in Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX); 12 percent in Vanguard REIT Index Fund Investor Shares (VGSIX)

Malkiel e-mailed a second portfolio that he discusses in his lecture "Timeless Investment Lessons." This portfolio allocates more assets to foreign and U.S. stocks and cuts out the real estate index fund. For the decade ending Dec. 31, 2010, $100 in this Malkiel portfolio grew to $195, or a return of 6.88 percent.

DAVID SWENSEN
$100 invested in Swensen's lazy portfolio grew to $199
(7.14 percent return)

David F. Swensen is Yale University's investing guru. He pioneered the use of hedge funds for Yale's giant endowment. Its value was $18.4 billion and it returned 9.6 percent for the decade ended Dec. 31, 2010. But for most individuals and institutions, Swensen suggests low-cost index funds like this portfolio from his one of his books, Unconventional Success: A Fundamental Approach to Personal Investment.

Portfolio consists of 30 percent in Vanguard Total Stock Market Index Fund Investor Shares (VTSMX); 20 percent in Vanguard REIT Index Fund Investor Shares (VGSIX); 15 percent in Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX); 15 percent in Vanguard Long-Term Treasury Fund Investor Shares (VUSTX); 15 percent in Vanguard Developed Markets Index Fund Investor Shares (VDMIX); and 5 percent in Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX)

Swensen's portfolio is one of eight "lazy portfolios" that is being tracked by Paul B. Farrell of MarketWatch.com, a subsidiary of Dow Jones, at www.marketwatch.com/lazyportfolio.

MARK T. HEBNER
$100 invested in one of Hebner's portfolios grew to $179
(6.01 percent return)

Mark Hebner is president of Index Funds Advisors Inc. of Irvine, Calif., and author of Index Funds: The 12-Step Program for Active Investors. He compared Florida's pension fund to five portfolios with different asset allocations from Dimensional Fund Advisors and five from Vanguard. His review can be found at www.ifa.com/florida and his analysis of other state pension funds can be found at www.ifa.com/states.

This portfolio consists of 14 percent in Vanguard 500 Index Fund Investor Shares (VFINX); 14 percent in Vanguard Value Index Fund Investor Shares (VIVAX); 4.67 percent in Vanguard Pacific Stock Index Fund Investor Shares (VPACX); 7 percent in Vanguard REIT Index Fund Investor Shares (VGSIX); 9.33 percent in Vanguard European Stock Index Fund Investor Shares (VEURX); 7 percent in Vanguard Small-Cap Index Fund Investor Shares (NAESX); 7 percent in Vanguard Small-cap Value Index Fund (VISVX); 7 percent in Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX); and 30 percent in Vanguard Short-Term Bond Index Fund Investor Shares (VBISX).

JARED FALTYS and NATHAN RAABE
$100 in the blend created by Faltys and Raabe grew to $207
(7.52 percent)

Jared Faltys and Nathan Raabe are wealth planners at Wealth Management based in Norfolk, Neb. They specialize in managing money for certified public accountants and other fee only advisers in Florida and across the country. At the Times' request, they created this portfolio of index funds for one of their Florida clients, Capital Accounting Company of Naples.

Their portfolio consists of 7.4 percent in Vanguard 500 Index Fund Investor Shares (VFINX); 14.6 percent in Vanguard Small-Cap Value Index Fund (VISVX); 13.6 percent in Vanguard Small-Cap Growth Index Fund (VISGX); 10 percent in Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX); 12.2 percent in Vanguard Total International Stock Index Fund Investor Shares (VGTSX); 9.2 percent in iShares Russell 1000 Value Index (IWD); 33 percent in Vanguard Total Bond Market Index Fund Investor Shares (VBMFX).



















How Florida pension plan investments stack up to index funds 07/29/11 [Last modified: Saturday, July 30, 2011 8:18pm]
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