Returns: Where In The World?

Ashby Monk

The Pacific Pension Institute event I was attending in Kuala Lumpur wrapped up yesterday. It was well worth the 24 hours of airplanes, as I came away with some new insights into the Asian marketplace — “If you’re not confused, you don’t understand.” — and a renewed appreciation for the challenges facing public pension funds throughout the Pacific and in particular in North America.

One theme that seemed to come up in a lot of conversations was the global search for returns by US pension fund managers that are trying hard to meet lofty return expectations — 7.5 to 8.5 percent in some cases. As someone said to me, “Where on earth do we find the returns we need? Seriously, Ashby, where? I’m all ears.” And so there is a growing community of under-resourced pension fund managers scouring the world for markets and industries in search of these mythical returns.

The irony in all of this is that these return expectations are high because the pension beneficiaries want to preserve their benefits, and governments want to keep their contributions low. So the burden falls on the pension funds’ investment teams to make up the difference. In other words, sponsors ask these (under-resourced) funds to generate returns that exceed the long-term return on equities! That’s right: in the 20th century global equities returned 5.8% and bonds 1.2% (or thereabouts) in real terms. So we’re asking pension funds to develop a diversified portfolio and beat long-run equity returns by more than 200 basis points. Sorry, team, that sounds crazy to me. What gives?

In short, the sponsors are asking pension funds to deliver unrealistic financial returns over the long run in order to generate short-term political returns. By using an unrealistic return expectation, the pain of paying for the pension promises can be kicked down the road to future generations. Anyway, I find all this really frustrating. But enough of that depressing stuff. Enjoy your weekend!

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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