Key Takeaways
- • Richard Ennis's October 2023 paper "Hogwarts Finance" argues that since the 2008-09 global financial crisis, U.S. public pensions have underperformed simple low-cost index funds by an average of one to two percent a year.
- • Ennis estimates that the resulting economic inefficiency costs U.S. beneficiaries at least $100 billion a year, citing overestimated diversification benefits and cost of alternatives and use of inappropriate benchmarks.
- • Andrew Coyne of the Globe & Mail cited Canada Pension Plan Fund staffing rising from roughly 150 employees in 2006 to more than 2,100, and external manager fees rising from $36 million in 2006 to $3.5 billion in 2024.
- • Nevada's Public Employees' Retirement System, managed by CIO Steve Edmundson, is presented as a model of passive, low-cost investing, with most assets in passive equity and bond funds.
- • IFA's Mark Higgins argues investment consultants' business model is threatened by index investing, creating a conflict of interest.
Summary
This commentary, published by Index Fund Advisors (IFA) and written by Creative Director Robin Powell, argues that U.S. public pension funds, which collectively manage around $4.5 trillion in assets according to the article's estimates, waste substantial sums through active management. The piece draws on an October 2023 paper by investment consultant Richard Ennis, titled "Hogwarts Finance," which finds that public pensions have trailed simple low-cost index funds since the 2008-09 financial crisis by an average of one to two percent annually. Ennis attributes this to a lack of intellectual rigor among chief investment officers and consultants, who in his view overestimate the diversification benefits of private equity, real estate and hedge funds, underestimate their costs, and use the wrong benchmarks. He estimates the resulting inefficiency costs U.S. beneficiaries at least $100 billion a year.
The article also cites Andrew Coyne, financial correspondent for the Globe & Mail, who criticized the Canada Pension Plan Fund for becoming, in his words, "essentially a giant hedge fund." According to Coyne's figures as quoted, CPP staffing grew from roughly 150 employees in 2006 to more than 2,100, and fees paid to external managers rose from $36 million in 2006 to $3.5 billion in 2024. Coyne reports total annual expenses above $5.5 billion and cumulative losses of $42.7 billion over an 18-year period. These figures are presented as Coyne's claims and are not independently verified in the piece.
As a counterexample, the article points to Nevada's Public Employees' Retirement System, described as one of the country's best-performing state pensions. Its former sole chief investment officer, Steve Edmundson, kept holdings in property and private equity modest and placed the bulk of assets in passive equity and bond funds. Asked by the Wall Street Journal about his daily trading strategy, Edmundson replied, "Do as little as possible, usually nothing."
The article identifies investment consultants as a structural obstacle. IFA's Mark Higgins, writing for the CFA Institute, argued that consultants' advice is often biased by their own self-interest, since widespread adoption of index funds would render the current consulting business model obsolete. The piece is explicitly promotional for IFA, which describes itself as a fee-only RIA based in Irvine, California, and it invites pension trustees to contact the firm. Its claims are presented as IFA's perspective rather than as neutral reporting.
The article also cites Andrew Coyne, financial correspondent for the Globe & Mail, who criticized the Canada Pension Plan Fund for becoming, in his words, "essentially a giant hedge fund." According to Coyne's figures as quoted, CPP staffing grew from roughly 150 employees in 2006 to more than 2,100, and fees paid to external managers rose from $36 million in 2006 to $3.5 billion in 2024. Coyne reports total annual expenses above $5.5 billion and cumulative losses of $42.7 billion over an 18-year period. These figures are presented as Coyne's claims and are not independently verified in the piece.
As a counterexample, the article points to Nevada's Public Employees' Retirement System, described as one of the country's best-performing state pensions. Its former sole chief investment officer, Steve Edmundson, kept holdings in property and private equity modest and placed the bulk of assets in passive equity and bond funds. Asked by the Wall Street Journal about his daily trading strategy, Edmundson replied, "Do as little as possible, usually nothing."
The article identifies investment consultants as a structural obstacle. IFA's Mark Higgins, writing for the CFA Institute, argued that consultants' advice is often biased by their own self-interest, since widespread adoption of index funds would render the current consulting business model obsolete. The piece is explicitly promotional for IFA, which describes itself as a fee-only RIA based in Irvine, California, and it invites pension trustees to contact the firm. Its claims are presented as IFA's perspective rather than as neutral reporting.
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