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How do Pension Funds make investment decisions?

ASSET CLASSES

RETURN

PRIVATE EQUITY

Owning companies directly with a few other partners

Pro: Top managers have shown they can consistently outperform market.

Con: Very Expensive, High Fees, Some PE strategies can be economically destructive, Subject to picking the top performers, Illiquid.

EQUITIES

5-15% of portfolio

Publicly Traded Domestic and International Stocks

INDEXED: Low fee, will follow the economy,

ACTIVE: Picking stocks that you think will do better than the market. More Fee, More Risk, possibly greater return

MODERN PORTFOLIO THEORY

BOTH are subject to big shifts, and are very liguid.

REAL ESTATE

office buildings, apartments, industrial parks, malls, hotels

~ 50-60% of portfolio

Pros: Inflation protection, real economy, familiar

Cons: Illiquid, Volatile /Bust, 2/20 fee

OR perhaps

Usually 5-15% of portfolio

INFRASTRUCTURE

Investments in assets that are needed for society to function: transportation, energy lines, hospitals, treatment plants etc...

PROS: Lower Risk, Stable Returns that match liabilities, Lower Fees. Invests in real economy can grow jobs, help communities. Inflation protection

CONS: Some high fee funds, Privatization, Long investment period, Hard to find good ones.

In US < 3% of most portfolios...but could be much larger.

Spreading your investments out over numerous asset classes reduces risk and maximizes return

FIXED INCOME

Government and Corporate Bonds

Mortgages, other asset backed securities

Pros: Lower risk, Lower cost, predictable returns, perform well when stocks perform poorly.

Cons: Lower returns, Ratings accuracy, Subject to manipulation by bundling, swaps etc...

Typically about 30% of portfolio

How to decide which investments will do the best job?

As members

what can we do?

  • EDUCATE YOURSELF
  • ELECT TRUSTEES WHO SHARE OUR VIEW OF THE WORLD
  • SHOW UP and ASK ?'s
  • Demand ACCOUNTABILITY

CASH

PRO= LIQUID

CON= probably worth less tomorrow than it is today

usually a very small part of portfolio

BUT IT DOESN'T ADDRESS SYSTEMIC RISK--eg 2008!

  • How much risk are we comfortable with?
  • What kinds of risk concern us?
  • How much are we willing to pay in fees?
  • How much expertise does the staff possess?

RISK

ASSET ALLOCATION

is a PROCESS

More videos about Hedge Funds

UNDERSTAND LIABILITIES

Determined by Actuaries

UNDERSTAND CAPITAL MARKETS

what's going on in the economy

DETERMINE EXPECTED RATE OF RETURN NEEDED TO MEET LIABILITIES OVER THE LONG TERM

Usually between 7-8%

WHAT ABOUT HEDGE

FUNDS????

  • Unregulated by SEC
  • 2/20 High fees
  • Risk range is huge
  • Can invest in ANYTHING
  • Not TRANSPARENT
  • Requires fund capacity

How do fees in hedge funds work

What is hedging?

Khan Academy Hedge Fund series

http://www.youtube.com/results?search_query=khan+academy+hedge+fund

Pension Funds are

Permanent Investors

  • Duty of Loyalty to Plan Participants
  • Duty of Care to manage those assets in good faith care and prudence

How Hedge Funds broke the economy

What is the difference between a fiduciary and an investment mgr.

FIDUCIARY

DUTY

Maximize long term returns at a prudent level of risk

Return

RISK

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