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How do Pension Funds make investment decisions?

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by

Marguerite Young

on 24 January 2015

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Transcript of How do Pension Funds make investment decisions?

Maximize long term returns at a prudent level of risk
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?
How to decide which investments will do the best job?
Pension Funds are
Permanent Investors
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%
ASSET ALLOCATION
is a PROCESS
How do Pension Funds make investment decisions?
Return
RISK
Duty of Loyalty to Plan Participants
Duty of Care to manage those assets in good faith care and prudence
What is the difference between a fiduciary and an investment mgr.
FIDUCIARY
DUTY
MODERN PORTFOLIO THEORY
Spreading your investments out over numerous asset classes reduces risk and maximizes return
BUT IT DOESN'T ADDRESS SYSTEMIC RISK--eg 2008!
WHAT ABOUT HEDGE
FUNDS????
Unregulated by SEC
2/20 High fees
Risk range is huge
Can invest in ANYTHING
Not TRANSPARENT
Requires fund capacity
As members
what can we do?
EDUCATE YOURSELF
ELECT TRUSTEES WHO SHARE OUR VIEW OF THE WORLD
SHOW UP and ASK ?'s
Demand ACCOUNTABILITY
RETURN
RISK
ASSET CLASSES
CASH
PRO= LIQUID
CON= probably worth less tomorrow than it is today
FIXED INCOME
Government and Corporate Bonds
Mortgages, other asset backed securities
INFRASTRUCTURE
Investments in assets that are needed for society to function: transportation, energy lines, hospitals, treatment plants etc...
REAL ESTATE
usually a very small part of portfolio
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
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.
office buildings, apartments, industrial parks, malls, hotels
Pros: Inflation protection, real economy, familiar
Cons: Illiquid, Volatile /Bust, 2/20 fee
Usually 5-15% of portfolio
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
BOTH are subject to big shifts, and are very liguid.
~ 50-60% of portfolio
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.
5-15% of portfolio
OR perhaps
More videos about Hedge Funds
How do fees in hedge funds work
Khan Academy Hedge Fund series
http://www.youtube.com/results?search_query=khan+academy+hedge+fund
What is hedging?
How Hedge Funds broke the economy
Full transcript