A combination of low interest rates and aggressive market return goals is driving pension funds toward more complicated, more dangerous and high-fee investments. Wall Street is happy to help out.The FT has the story:
Mr Ablin has steered clients towards real estate investment trusts, preferred stock and master limited partnerships for infrastructure and pipelines, while also advocating high dividend-yielding stocks in the telecoms and utilities sectors…Yet chasing income raises the risk that investors are piling into crowded trades that may reverse with a change in sentiment. Even if not, it may simply serve to pull down yields elsewhere…André Perold, chief investment officer for HighVista Strategies, a hedge fund, and former professor of banking and finance at Harvard, says that in this environment the only way to hit return targets is through greater risk taking, through for example higher allocations to equities and equity-like asset classes.For most institutions, however, he says that such an approach is a “loser’s game”. Calpers is a case in point. The pension fund has $5.1bn invested in hedge funds, but the five-year annual return from its Absolute Return Strategy is 0.7 per cent – better than its overall portfolio, but far worse than that claimed for the average hedge fund and nowhere near its long-term return requirement.
These risky investments can raise returns, but they can also lower them. The one and only thing they are guaranteed to produce is fat fees for Wall Street investment banks and hedge fund managers.Via Meadia suggestions for public pension funds: Promise only what you can deliver, save aggressively, invest conservatively. It isn’t that hard, but you have to be honest and prudent to make it work. Politicians and union leaders who promise what they can’t deliver, not surprisingly, won’t deliver what they promise — except perhaps to the Wall Street fat cats who are the true beneficiaries of the current system.