A recent analysis by Markov Processes International, Inc. (MPI) has shed light on the investment strategy of the City of Tampa Fire and Police Pension Fund, challenging the notion that its success is solely due to stock-picking. The $3.2 billion fund, known for its unconventional approach of relying heavily on selecting single stocks through a single manager, Bowen, Hanes & Co., has outperformed or matched its benchmarks in nine of the last 10 years. However, MPI’s study suggests that these results could be achieved through a more diversified investment strategy, aligning with Modern Portfolio Theory’s emphasis on diversification to manage risk.

Using MPI’s Stylus Pro software, the analysis performed a returns-based examination of the fund’s performance, creating a long-only portfolio of market indices that closely mimics the fund’s returns. This finding indicates that the fund’s success is not necessarily a result of superior stock-picking but could be attributed to broader market exposures. Michael Markov, Founder and CEO of MPI, remarked on the implications of these findings for institutional money managers, suggesting that similar results might be obtained with less risk through diversified instruments like ETFs.

The study also noted that while Bowen’s approach carried moderately higher risk compared to 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. Nonetheless, the analysis underscores the potential for diversified strategies based on Modern Portfolio Theory to achieve comparable returns without the inherent risks of stock-picking.

Markov’s conclusion that ‘diversification works’ reinforces the principles of Modern Portfolio Theory, suggesting that for large, liquid portfolios, the alpha generated from stock-picking alone may be minimal. The full report, offering deeper insights into these findings, is available for further review. This analysis not only questions the efficacy of stock-picking in large portfolios but also highlights the enduring relevance of diversification in investment strategy.

This news story relied on content distributed by None. Blockchain Registration, Verification & Enhancement provided by NewsRamp. The source URL for this press release is Analysis Suggests Diversification Could Match Tampa Pension’s Stock-Picking Success.