Study: On Stocks, Public Pensions Excel at Picking Local Winners


When it comes to picking stocks, large public pension funds excel at investing in local winners.

That’s the main finding of a research paper issued this week by Jeffrey R. Brown, Joshua M. Pollet, Scott J. Weisbenner.

[The full paper can be found here.]

The paper studied the investment behavior of 27 state-level public pension funds that manage stock portfolios internally.

The authors found that the funds overweight their portfolios toward in-state companies, and those investments yield market-beating returns.

More on the research, from the Washington Post:

[The authors] discovered a surprising amount of local investment in publicly traded companies. On average, plans put 9.7 percent of their money in companies headquartered in their own respective states. Had they evenly spread out their money, they should have only invested around 5.6 percent of their U.S. portfolio in such stocks. This is three times more home-state enthusiasm than other researchers have measured at institutional funds.

Not only are state pension funds more likely to buy local stocks, but they are also supernaturally good at it. The stocks they picked outperformed the stocks they didn’t pick by 3 percentage points a year.

The advantage nearly tripled among small (non-S&P 500) companies in a state’s primary industry. In that arena, the chosen stocks beat their counterparts by 8.3 percentage points a year.

“Put simply, CALPERS appears to know which in-state small technology stocks to buy and which to avoid, and Texas Teachers knows which in-state small oil companies to buy and which to shun,” the authors write in their paper

The authors provide a few other theories as to why public pensions are so good at picking local winners – and one particularly interesting line of reasoning explores the correlation between stock-picking and political donations.

Read the full paper here.

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