A Universal Investment Portfolio for Public Pension Funds: Making the Most of Our Herding Ways

Herding is human nature. There is ample evidence of it in the management of public pension funds in the United States, where their effective equity exposure clusters around an average of approximately 70%. Extreme diversification is universal. These two aspects of herd behavior have proven benign. Where herding has had a detrimental effect is the funds' pouring more than a trillion dollars into alternative investments after alts ceased adding value to institutional portfolios more than 10 years ago. One might say two out of three ain't bad. And yet, the heavy use of active management-and alts, in particular-has cost the funds dearly. Public fund managers need to understand that their strength is not active money management. Rather, it is their potential to become the lowest-cost producers of investment returns on the planet. This article argues in favor of a one-size-fits-all approach to managing public pension investments-namely, embracing a Universal Investment Portfolio.