Why Targeted Investing Does Not Make Sense!

Abstract

John R. Nofsinger is an Assistant Professor of Finance at Marquette University. Proponents claim that economically targeted investments (ETIs) can earn a prevailing risk-adjusted rate of return while also providing an additional economic benefit to the plan participants. This paper discusses the fallacies in the reasoning behind ETIs. In short, the structure that would make ETIs acceptable under the fiduciary standards of the Employee Retirement Income Security Act (ERISA) may also create a lemons problem which makes ETIs poor investments, on average. An agency problem derived from the organizational structure of public pension plans can exacerbate the lemons problem. The empirical evidence is consistent with this hypothesis. I find that the risk-adjusted portfolio returns associated with funds using ETIs are low.

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