In recent weeks, CalPERS and Motorola have both made headlines in the investment press for taking significant steps in their investment programs. Motorola are paying $3.1bn to Prudential to buy pension annuities, moving both assets and liabilities off of their corporate balance sheet; the third biggest such annuity buy-out ever in the U.S., trumped only by GM and Verizon’s 2012 mega-deals. Meanwhile, CalPERS are pulling the plug on a $4 billion hedge funds program. Neither action was driven by a desire to follow the herd: indeed, both actions involve significant “maverick risk,” the extra risk that comes from being different.
Whatever your opinion about the moves that the two organizations have made, they both send a clear signal that “we are thinking for ourselves.” And that is a hugely positive thing for markets.
I’ve made the point in past blogs that an open market is a wonderful mechanism for the aggregation of opinions. The case for capitalism rests on the idea that markets are good at sending capital to the right places—not as voted by some central committee but as voted by the actions of a vast range of investors. Even though it’s not perfect, it beats the alternative ways of allocating capital.
But an aggregation mechanism on its own is not enough for the wisdom of crowds to apply: the views that are being aggregated need to be diverse, and they need to be developed independently. And that’s why it’s a sign of market health when investors such as CalPERS and Motorola are unafraid to stand out and take actions based on their own analysis of their own situation.
Markets need people to disagree. They need to disagree about what they are trying to achieve, and they need to disagree about the best way to achieve it.