Bye Bye Equities
The Star Ledger reports that New Jersey state officials "adopted a plan to shift billions of dollars in state pension money to private investment managers and set a course to reduce the funds' heavy reliance on the stock market." Journalist Dunstan McNichol describes a $16 billion reallocation from stock "in favor of larger holdings in toll roads, hedge funds and international stocks."
A harbinger of things to come?
Many experts agree that pending regulations and increased focus on pension obligations will move asset allocation to center stage, resulting in a variety of questions that demand good answers. (Asset allocation is oft-cited as the most important determinant of performance.)
1. How will an increased emphasis on alternative investments change the expected return-risk tradeoff of the pension portfolio (particularly as relates to estimating pairwise correlations of returns that vary over time)?
2. What are the liquidity implications of investing in public works projects, hedge funds, international stocks, commodities, private equities and so on?
3. How should pension plan decision-makers proceed in selecting alternative investment consultants (especially with respect to their ability to thoroughly analyze the impact of performance fees on net returns)?
4. How do alternative fund managers value their holdings, if at all?
5. How will overseers evaluate performance in the event of diminished transparency of returns and risk drivers that influence returns?
6. Will fiduciary liability change for funds that invest outside the traditional mix of equities and debt?
7. Do fiduciaries need additional training to feel comfortable asking the right questions about alternatives (and interpreting the answers with confidence)?
8. How should the Investment Policy Statement change to accommodate the use of alternatives?
Get ready pension fiduciaries! There is a lot of work to be done in moving the money around.
