The Pit and the Pendulum (Part 2)

You can’t make this stuff up.

Yesterday I discussed how institutional investors are being forced to take risks they’d rather not take because of the ultra-low interest rate environment we’re in. It’s no news that pension funds are under a lot of pressure to achieve significant returns over the next 10 years. The financial meltdown did a lot of damage.

Now those funds need to make up their losses. The problem is, global growth has downshifted. Instead of 3% real GDP growth in the developed world, we’re looking at 2-2.5% growth. The combination of deleveraging, default risk, and re-regulation has many talking about a “new normal” of reduced expectations.

But those pension funds still need returns. And you can’t get 8% returns out of 3% 10-year Treasury yields. It’s like trying to spin straw into gold. So these institutions are allocating assets into ever-more risky classes in ever-more exotic vehicles.

Enter the Ohio Highway Patrol Pension Fund. This $732 million fund is shifting assets around, taking $75 million out of domestic equities and putting it into foreign equities, foreign bonds, and commodities. Hey, I think there are opportunities out there. But wow, that’s a big move.

And it illustrates my point. The trustees are taking on risk and reaching for return. Ohio taxpayers sure hope they’re right.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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