Study Questions Efficacy of Stock-Picking in Pension Funds, Advocates for Diversification

A groundbreaking analysis by Markov Processes International, Inc. (MPI) has cast doubt on the necessity of a stock-picking strategy for pension funds, suggesting that diversification could yield similar results with less risk. The study focused on the City of Tampa Fire and Police Pension Fund, which has notably outperformed its benchmarks in nine of the last 10 years through a concentrated stock-picking approach managed by Bowen, Hanes & Co. This method stands in contrast to the broader diversification strategies typically employed by pensions and endowments, which are grounded in Modern Portfolio Theory.

MPI's research, conducted using its Stylus Pro software, revealed that the fund's returns could be closely replicated by a more diversified portfolio of market indices. This finding challenges the perceived uniqueness of the fund's strategy and underscores the efficiency of diversification in managing large portfolios. Michael Markov, MPI's Founder and CEO, emphasized that while the fund's approach has been celebrated, the reality is that similar outcomes can be achieved through less risky means, such as investing in a basket of ETFs.

The analysis also noted that the fund's strategy carried moderately higher risk compared to other equity-heavy public pensions, though its Sharpe ratio indicated better efficiency than its benchmark. Despite these results, the study advocates for the principles of Modern Portfolio Theory, suggesting that diversification not only works but is a more sustainable strategy for large institutional investors. The full report, offering deeper insights into these findings, is available for further review.