Treasurer Torsella Announces Expansion of Lower-Cost Passive Investment Strategy

Torsella to save $300 million over 20 years in Wall Street fees

Harrisburg, PA – Pennsylvania Treasurer Joe Torsella today announced that he is expanding Treasury’s passive investment strategy to include the publicly-traded fixed income portfolio, following through on his pledge to protect taxpayer money by saving on Wall Street fees. The move – when combined with an earlier shift in Treasury’s equity portfolio – will save nearly $9 million per year in fees, totaling approximately $300 million when compounded over 20 years. The move also takes a further step to change the pay-to-play culture that has plagued the Commonwealth.

“My job is to help build the futures of Pennsylvanians by putting their interests first, not Wall Street’s. Today’s announcement completes a process we began last year to capture better market returns for the lowest possible cost. When someone puts their money into Treasury’s care, they’re putting their trust in us that we’ll be careful stewards of the public’s funds. That’s a trust I never intend to break.”

Pennsylvania Treasurer, Joe Torsella

The transition of fixed income investment holdings to passive strategies, where available, is expected to take place over the next month. Torsella will authorize the transition of more than $2.9 billion in fixed income investment holdings from active managers to lower-cost passive strategies, resulting in an estimated savings of $3.78 million annually that was paid in fees, and almost $110 million in additional savings when compounded at 3.5% over 20 years.

In April 2017, Torsella announced that he would move $2.4 billion in public equity investments holdings to a passive investment strategy. The move of those holdings was estimated to save $5 million per year in fees (approximately $195 million in total savings when compounded over 20 years).

Passive investments buy and hold securities proportionately to their weighting in broad market index, such as the Bloomberg Barclays Aggregate Index or the Bloomberg Barclays US 1-5 year credit index. With extremely low fees, investors get better returns than they would from funds with similar holdings but higher management fees and transaction costs, which act as a drag on investment performance. In recent years, passive investing has become the “strategy of choice” and continues to grow, according to the Wharton School of Business.

Comprehensive research by Standard and Poor’s shows that in most cases, active managers are unable to pick enough winners to justify their fees. Over the most recent 15-year period, 70% of all actively managed Global Income Funds, for example, underperformed a broad market index. More than half of Treasury’s active fixed income managers have failed to beat their benchmarks over the last five years.

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