A Penn State Smeal College of Business finance professor managed to avoid getting caught in the rhetoric flying in Harrisburg as Democrats and Republicans try to hammer out a budget.
James Miles, professor of finance and Joseph F. Bradley Fellow of Finance, testified in June before the Pennsylvania House of Representatives about one of the most contentious issues facing state lawmakers -- state pension reform, specifically how Pennsylvania’s pension is managed.
“I was a bit apprehensive because you can’t anticipate what you will be asked,” Miles said. “Fortunately, they asked me questions that were right in my wheelhouse.”
Miles said he has long been a proponent of passive management of investments. Investing in index funds produces equal or better returns than actively managed funds and index funds require much lower fees.
“Here’s my assessment of what finance research has revealed, that it’s very hard for actively managed funds to beat those that are passively managed,” he said.
Miles testified at the request of state Rep. John McGinnis, who represents the 79th district in Blair County. McGinnis earned his doctorate from Smeal in 1993 and was then an associate professor of finance at Penn State Altoona.
Since a 401k-style retirement plan has been suggested for new employees, one representative asked Miles if he thought the typical state employee understands enough about investing to manage a 401K-style account. Miles responded that it depends on the simplicity of the investment menu offered to employees.
He referred to the federal government’s Thrift Savings Plan that offers only index funds representing American stocks, the remainder of the world’s stocks, long-term treasury bonds, and short-term treasury bonds. Miles referred to research results suggesting that this easy-to-understand menu will produce better results than a lengthy menu containing actively managed funds.
McGinnis invited Miles to testify two years ago about valuing pension liabilities.
Miles said both experiences were positive
“I enjoyed it,” he said. “Most people who testify are there to advocate for a position they feel strongly about. I’ve long been on a campaign for passive investment.”