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
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
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
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