Monday, August 29, 2011

AAA: Pensions Turning to Alternatives

Online PR Media reports, AAA: Pensions Portfolios Turning To Alternative Investments:
The results of a new poll indicating that more pension portfolios are investing in alternatives has been welcomed by Alternative Asset Analysis (AAA).

The recent SEI Quick Poll shows that the percentage of executives from pension funds claiming to have investments in alternatives has increased to 78 per cent, from 51 per cent in 2008. This percentage rose to 53 per cent in 2009 and to 65 per cent last year.

Anthony Johnson, an analysis partner for AAA, an alternative investment advocacy group, said, “These figures show an impressive increase in the past year, compared with the increases measured over the previous few years.

“This seems to support our suggestions that more pension funds are moving toward alternatives this year as they offer a safer haven in light of current instability on the stock markets.”

Chief Actuary at SEI’s Institutional Group, John Waite, said, "Alternative investments continue to be integrated into pension portfolios as another channel for mitigating risk, while providing additional return apparently.”

He added, “Ongoing volatility of interest rates continues to put liability risk as a primary concern for plan sponsors.”

He also stated that many fund managers seem to be slightly confused as to what the best investment strategy is during the current economic climate and are opting for a highly diversified approach. Many are investing in asset classes such as gold, antiques and forestry, which have all been performing well compared with traditional equities.

Forestry is a particularly interesting option for pension funds as there are often choices to invest in funds themselves or to buy forested land directly and gain returns when the trees in the timber plantation reach maturity and are sold off. Greenwood Management has several timber plantations in Brazil, where there is growing demand for non-native timbers for the domestic steel industry and for export to Asia, where markets for timber and forestry products are extremely strong and growing.

I cringe every time I read these polls about pensions moving into "safer," illiquid alternative investments. It is complete and utter nonsense to claim that alternative investments should be "integrated into pension portfolios as another channel for mitigating risk, while providing additional return.” If pensions don't know what they're doing, they're going to get clobbered with these alternative investments.

I know, those smart pension consultants are busy checking off the list, fitting you in a box. They'll shove you in private equity, infrastructure, real estate and now timber. These "geniuses" know nothing more than a one-size-fits-all approach for all their clients, even if in many cases it simply doesn't make sense.

Oh, and what about those volatile stock markets? So what? Big deal! If pensions are smart, they'll follow CalPERS' lead and ride out the big waves, buying the dips, especially in large cap risk stocks. That's exactly what I did in my personal portfolio over the last few weeks, trading each dip, and I couldn't care less what any pension consultant is recommending. I'll take my liquid approach over theirs any day of the week. Most of these pension consultants are clueless about why markets are so volatile.

If they actually did their homework, they'd figure out the extreme volatility was caused by high-frequency trading algorithms which made markets more volatile this summer, scaring investors away. It's all a bunch of nonsense, but pensions can hide in illiquid alternatives and claim they're "managing risk." This is pure rubbish. They're actually taking on illiquidity risk, and will end up paying a high price for their herd mentality. Now I understand why they call it "dumb money." They blindly scoop up whatever garbage pension consultants throw their way.

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