One of the biggest mistakes investors in managed funds make is chasing returns. Now, New York City pensions look as if they want to make chasing returns official policy.
Larry Schloss, the city's chief investment officer, wants New York to emulate the Ontario teachers pension fund. It's easy to see why. The fund has seen a 9.6 percent return on its investments since 2003, compared with an 8 percent gain in New York's pension funds.
What's more, Ontario pays far less in fees to asset managers because it actually makes investment decisions on its own. To do that, it employs real live investment professionals, paying competitive salaries. By contrast, the guys running New York's pension system get paid an average of $100,000 each. Schloss earns just $224,000.
He imagines that the city could hire "a VP at MetLife who makes 500,000 bucks." But this is probably unrealistic.
New York is just a far more competitive place than Toronto when it comes to top-quality investment professionals. There are more opportunities for making tremendous amounts of money. If you're a New Yorker who can generate consistent 9.6 returns without leverage, you can easily raise money for a hedge fund that will make you a millionaire.
What's more, the Canadian fund has benefited from that country's real estate boom. It owns a lot of assets that have risen in value with the home and commercial real estate market. If Canadian real estate crashes—as some expect it will—the fund performance will probably suffer.
The average return on the S&P 500 for the past decade is 7.6 percent, which means that a simple index fund could achieve much of the gains that New York's pension funds need to remain solvent. Why compete with Wall Street and hedge funds when you can make perfectly respectable returns passively?
By CNBC's John Carney. Follow me on Twitter @Carney