Markov Processes International, Inc. (MPI) has released a study analyzing the City of Tampa Fire and Police Pension Fund's investment strategy, which has long relied on stock-picking by a single manager, Bowen, Hanes & Co. The $3.2 billion fund has outperformed or matched its benchmarks in nine of the last 10 years, but MPI's analysis suggests these results could be achieved through a more diversified approach, aligning with Modern Portfolio Theory's emphasis on diversification to manage risk.
Using MPI's Stylus Pro software, the study performed a returns-based analysis of the fund's performance, creating a long-only portfolio of market indices that closely mimics the fund's returns. This finding challenges the notion that the fund's success is solely due to superior stock selection, suggesting instead that thematic exposures to certain sectors, like technology, play a significant role.
Michael Markov, Founder and CEO of MPI, commented on the findings, stating, "While the eye-popping stock-picking has made the managers at Bowen seem like modern-day Warren Buffetts, the truth is much more mundane and instructive for other institutional money managers." He highlighted the potential for achieving similar returns with less risk through diversified strategies, such as investing in a basket of ETFs.
The analysis also noted that while Bowen's approach presented moderately higher risk than other pensions and endowments, it was only slightly higher than other equity-heavy public pensions. The fund's Sharpe ratio, a measure of risk-adjusted return, was better than its benchmark, indicating efficient performance despite the higher risk.
MPI's findings underscore the validity of Modern Portfolio Theory, suggesting that diversification can yield comparable returns to stock-picking without the associated risks. "Diversification works," Markov said, emphasizing the limited true alpha in managing large, liquid portfolios through stock selection alone.
The full report can be found here.
