An Evangelist for “Active Management”

Hobson is well-known for her friendship with the Obamas, her marriage to Star Wars billionaire George Lucas, and her deep ties to Chicago’s political machine. Less known is her success convincing pension overseers to funnel unionized workers’ retirement savings to her investment management firm, all while she leads a publicly traded company that is hostile to the labor movement.

Hobson’s balancing act between finance, anti-union capital, and labor has been predicated on her sales pitch to pension officials about “active management” — which seeks to beat the market by actively picking stocks — that proponents insist deliver better results than low-fee stock index funds. Hobson told an audience in 2019 that investors “will understand that it is worthwhile to pay for an active return.”

If that was true, Hobson and pension officials might be able to insist that big returns for union workers’ retirement funds justifies funneling money to a top official of Starbucks even as the company now tries to block a union.

But the investment results tell a different story:

• The Chicago Teachers’ Pension Fund, which serves ninety thousand active, inactive, and retired unionized teachers and principals, has $79 million invested with Ariel as part of a foreign stock strategy. According to fund documents from late last year, over the past five years, the Ariel strategy returned 4.5 percent, compared with the MSCI index of foreign stocks returning 8.8 percent. The difference cost the pension fund about $16 million.
• The Illinois State Universities Retirement System, with two hundred forty thousand mostly union members and retirees, has plunged $129 million in the same strategy, while the Cook County pension, with forty thousand nearly entirely unionized members and retirees, has put in $121 million.
• The Chicago municipal employees’ pension fund, with more than thirty thousand unionized members and retirees, has invested $109 million into Ariel’s Small Mid-Cap strategy of domestic stocks, which by Ariel’s own admission has returned 12.1 percent over the past ten years, compared to the S&P 500’s return of 14.6 percent over the same time period — a difference of more than $2 million per year.
• The Chicago Water pension fund, with forty five hundred union members and retirees, has put in $103 million into the same strategy, while the Chicago Transit Authority pension fund, with eighteen thousand union members and retirees, has put in $66 million, and the Laborers’ Annuity and Benefit Fund of Chicago, with more than seven thousand union members and retirees, has put in $37 million.

“The problem with active management is that the overwhelming majority of active managers underperform net of fees,” Ted Siedle, a former attorney with the Securities and Exchange Commission (SEC), the financial industry’s top regulator, told the Lever. “That has been constant for decades. It’s never a surprise, it’s to be expected. Anyone who thinks that’s going to change is delusional. You would know going in that the likelihood that your active manager is going to outperform indexes is extremely slim.”

Siedle’s criticism has been echoed by Berkshire Hathaway CEO Warren Buffett, who has said that by pursuing active management, investors are “certain” to get “worse-than-average results.”

New leadership at the SEC appears to share Buffett and Siedle’s concerns. William Birdthistle, a law professor who was tapped in 2021 to lead the Division of Investment Management at the SEC, is a skeptic as well. As he told the South Bend Tribune in 2017, by exiting active management, “What would you be giving up? High fees with no assurance of positive returns.”

“An incredibly small number of active managers beat the market consistently,” Birdthistle continued. “The alternative — investing in low-fee index funds — is the most sensible conclusion.”

Deep Ties to the Chicago Machine

The Lever contacted nearly every pension trustee of the funds invested with Ariel to ask about their returns. None responded to a request for comment.

The pension funds’ decision to stick with Ariel despite repeated issues with underperformance — Ariel is currently on a “watch list” for termination with the Chicago Teachers’ Pension Fund — coincides with Hobson and Ariel forging deep ties to the powerful in Chicago and nationwide.

Hobson is the vice chair of World Business Chicago, the city’s economic development organization, and was appointed to the position by the organization’s current chair, Chicago mayor Lori Lightfoot. Hobson also donated $31,500 to previous Chicago mayor Rahm Emanuel.

Hobson has very close ties to the Obamas. Hobson is the cochair of the Obama Foundation Chicago Committee, and she and her husband’s family foundation has donated at least $1 million to the Obama Foundation. Hobson raised money for Barack Obama’s 2008 and 2012 campaigns. Hobson is also a member of the board of JPMorgan Chase.

Hobson is also a prodigious donor to Democratic campaigns, donating over $3 million to Democratic super PACs in the past few years.

Ariel’s other co-CEO, firm founder John Rogers, was a cochair of the Obama inauguration in 2009 and sits on the board of directors of the Obama Foundation.