I would have preferred to use a saltier title for this post, but I watered it down quite a bit. In any case, I have just read about a major public pension system that decided to purchase 229,643 AMC shares during the second quarter. It hadn’t owned any shares of AMC as of 3/31/21. You may recall that AMC benefited tremendously as a MEME stock. In fact, the stock rocketed 27 times in value in the first quarter! This price appreciation was powered by individual investors using social media to push up the stock.
Amazingly, AMC, which had filed to sell more shares in June, warned investors that its stock was very risky at that time. So far in the third quarter, AMC stock has slipped 35.4% (as of 8/4 at 1:48 pm). In comparison, the S&P 500 has gained 2.3% so far in the third quarter. I am shocked by this decision. The behavior exhibited is certainly not institutional in nature. Aren’t we all taught to buy low and sell high? Purchasing this stock based on retail investor enthusiasm after the stock has appreciated 27 times and with little fundamental support speaks to desperation. Oh, yes, I forgot to mention that this public fund ranks as one of the most poorly funded plans in the country.
As of this afternoon, that stock purchase ($13 million at the time it was bought) is down more than $6 million or 46.4%. Yes, the $13 million “investment” is small relative to the size of the plan, but it seems as if the purchase was more like placing a bet on RED in Las Vegas or Atlantic City than it was an investment. Come on folks. This is no way to run a pension plan. A pension can not afford high volatility in its investments, which leads to volatility in the funded status and then contributions. If a higher contribution is required during the down cycles, the pension does not get this money back in the up cycles.
I am continually surprised at the persistence of the belief in active investment management in large liquid markets. As a reformed PM I understand that the market is the perfect knuckleball pitcher and even the acknowledged professionals are lucky to hit the pitch. For those few with the actual ability to see the ball, even a knuckle ball, their success rate generally fails to justify their fees.
With apologies to a country western song; Beer is good. Business is hard. People are crazy.
Hi Sanford – thanks for your excellent observation and comments. I couldn’t agree more. First, pension plans neglect or refuse to have their liabilities drive the asset allocation and then they engage strategies that are too expensive and often fail to produce returns in line with liability growth. When will our industry learn?