Dude, you couldn't find alpha if it walked up behind you and smacked you in the ass. lol

Ok ok I'm done with this thread now. You're a funny dude though. Stupid advice. But funny as all get out.

(you never did answer the unanswerable question that destroys your argument....picking out the over performers/alpha generates/whatever you want to call the "best of the best" beforehand isn't possible...so you lose, good day now)

https://www.youtube.com/watch?v=ogAqgkkTV5U

Oh you. It's as if you're involved in real estate and think you are a master of the markets as a result. Keep on generating that alpha by matching the general market's returns and risk profile, champ. I'll head back to the trading thread where people with a clue can be found.

RikaKazak-

Can you please understand that DickFuld is pointing out that a pension fund isn't looking for straight alpha?

They can't afford downswings like an individual.

They need a return that is shaped differently.

Rika,

You are wrong here. Pensions are very different animals in both equity and bond investments. Very different time horizons, duration concerns, liquidity requirements, etc.

This is really the best answer so far. A city does not need a pension fund and we do not need a social security fund.

Imagine a city with 10 employees and 100 residents and 5 retirees. If in the future as long as you keep the same ratio say 15 employees and 150 residents and 8 retirees. All you need to do is have the correct ratio and you don't need a pension fund.

Suppose 20% of city revenues are used for the pension. That should cover all pensions. A pension fund is a sign of overspending by the government.

Thus as a taxpayer I hope your pension fund goes broke. But most people would be better throwing the entire thing in BRK-A.

This is probably true, but it's not realistic to expect the local government to be able to control demographics and economic activity enough to generate stable, reliable tax revenue streams that will always be there to cover retiree obligations. Think about all the moving pieces here that you have to worry about - you've got net immigration to the community, retirement rates for the civil servants, longevity of civil servants after retirement, and net changes in local amount of economic activity generating taxes. If any of those things move unpredictably, and realistically every one of them will at some point, then your planned "balance" of tax revenues to retiree claims will go wonky. The whole point of having a pension fund is to accumulate funds as the retirees earn their benefits so that when they retire the money is there for them and isn't an immediate claim on taxes available at that time. The problems isn't that a pension plan exists, the problem is that governments built a "plan" around the idea that they could put in small amounts of money and the rest would be made up by high investment returns. It's a nice idea if it works, it's a catastrophic idea if it doesn't.

This is true, and all of those factors differ from plan to plan. A very mature plan may be just paying benefits for people that retired in the 1990s - the liquidity restriction on this type of plan are enormous (you may be distributing, say, 5% of the fund every year). If the plan has a lot of active employees contributing, this is not such a concern because the contributions coming in from employees can offset immediate benefit payment needs so the invested assets can be somewhat less liquid.

The duration concerns are also big for pension funds, there are relatively few fixed income investments with a duration profile that matches pension obligations. There are lots of derivative products now that can help deal with this but that's not something you want to mess around with in a small plan with relatively unsophisticated pension committees.

weighing in on index vs. mutual fund. ie DickFuld vs Rika, especially when you get to big numbers... is the question of how much Management EXPENSE %
(MER) are you paying for the Mutual fund vs the index fund?
on 100 million funds invested.. typical Mer's are 2% or 2 million dollars per year if you make money or if you lose .. pay up. typical index fund MER can be 0.5-0.25%
How long has your mutual fund survived?
If it is relatively new its most likely junk, basing their stellar performance on recent data.
"there are some truly great managers"
if this is true, there are only a handful of them and they are running funds that have a 15+ year history and can average better than the index fund.
This is no small feat to do.

How much do you (the portfolio) have invested?

Look into Detroit's recent woes. Declared bankruptcy and a huge chunk of what they owe is owed to pensioners. Pensioners got a trim. The lenders that gave credit to the city got a big fat kick in the nuts.

Detroit pension woes..
Pension manager gets jail.
Mayor gets jail etc..

http://www.freep.com/story/news/loca...rial/17236441/

The equity fund I mentioned has about a 0.6% expense ratio for active management, and the bond fund is at about 0.5% for institutional shares. In fact, I very rarely (maybe never?) see institutional shares of mutual funds charge 2%. Maybe you could share with us some of those long standing and large 2% expense funds for us.

The bond funds mentioned is widely considered to be one of the best in the business. Jeff Gunlach has been around for decades (think he was with TCW for 25 years, and now doubleline for the past 5) and since running one of the largest bond funds, he has consistently beaten indexing, and he has beaten it hard as is evidenced by results. I think Jeff is one of the best bond fund managers in the world, perhaps even the absolute best.

FCNTX has been around for half a century. It is one of the most reputable funds in the business. Since surpassing the S&P500 in the 1970's performance wise, it has beaten it ever since, and in dramatic fashion. From 1970 to now, $10k in FCNTX would be worth $2.1M today, while SPY would be $870k. I gave risk measurement data up above going out 10 years, and since I don't feel like doing any digging I can quickly expand that out to 15 years vs SPY. FCNTX is beta 0.79, 0.47 sharpe, 13.64 std deviation, with a 7.74% return. SPY is beta 1, 0.24 sharpe, 15.28 std deviation, with a 4.58% return. It has managed to produce these returns despite being one of the largest funds in the world. Again it is managed by someone myself and many others consider to be one of the best in the business, William Danoff, who has been at the helm for 24 years. This outperformance for this long of a time, with this amount of money, basically eliminates (it can never be 0% right?) the notion that the fund has just gotten lucky for all these years.

All that said, there are still better ways to allocate assets than what this thread has discussed but I obviously simplified my approach for the purposes of active funds vs passive funds. Through my own research, it seems far wiser for a pension to have about 45-55% in stocks (both active and passive funds), 10-15% in private equity (includes PE/GE/VC), 10-15% in assets like real estate and other non-equity/non-fixed income investments, rest (median 25%) in fixed income and bond funds. Of course counterparty risk starts to become an increasingly important issue the larger a pension gets, and so it is subject to change over time to reduce exposure to each fund's allocation.

Additionally, extremely large pension funds (not relevant to this argument but worth mentioning) should have far more of their equity (stock) investments in passive funds for this portion, if not all of it. It becomes almost pointless for pensions with tens of billions in size to invest in mutual funds, when they can hire their own staff and research teams to help guide allocations for them.

semi-grunching here....

i hate to sound like a 70 year old women, but you have need to learn alot more about pension management i think. maybe get some books (funding position, retired/active permeatations, sponsor status etc.).

i do sort of intuitively agree with you that pension funds that are underfunded should have aggressive investment plans, especially in countries with good social nets i.e. try to achieve gold-plated pension through investment but get solid poor elderly government payments if the pension plan blows up)... but it seems like the more underfunded the pension plan the more conservatively it invests.... sorry i may have inferred more than you said.

if the plan is nicely funded then i think they go low risk and just lock in the future payments...... i think with huge stock market gains of last 3 years you've seen sponsors moving to bonds to lock in the future pension payments.

So, wanted to give an update. I attended my first meeting a few weeks ago. It was pretty interesting. They are using an outside company as management, but we have a "board" of 5 who vote on the actual investments. The adviser is only there to give recommendations and then input the orders, but he doesn't do anything without the agreement of the board. I am considered a "backup" in regards to our representation to the pension fund, but since the other guy wasn't able to make it I got thrown in there with full voting authority. I am about 99.9% sure that sometime next year I will take over and that other guy will step down.

Two of the guys on the board are strictly volunteers and are receiving no compensation. One of them is older and is considered the "director." We don't have names I'm just using them as common terms.

So, long story short, there are quite a few funds that they are invested in. They are mainly mutual stock funds and then a big group of bond funds and a floating rate fund among others. It is doing well, but the monthly payouts are larger than what we are bringing in on the contributions. We briefly talked about that issue and how dividends are being reinvested, but even if we were to take the dividends in cash, it still wouldn't make up much of a difference.

One of the funds was dropped because it was seriously under performing. Then they gave recommendations on who else to add based on historical performance and we voted on which one to replace.

We also hold a commodity fund that they bought back in June which is down 12%. It's only about a 2% position, but I expressed my concern with the commodity fund and the "director" came back and said he liked it as a "hedge." Maybe I'm wrong, but I do not agree with this assumption and do not believe based on commodities that we should have a commodity fund in the pension. It might have been great in 2008, but not in 2014 when the commodities already peaked and had a large sell off.

The director asked the advisor if his company's clients hold the fund and he quickly said "no" and that we are the only pension that holds that fund.

Overall, I think we can do better. I didn't completely agree with everything they are doing and sort of have the feeling that they just want to throw words around. They were talking about adding a Vanguard fund (we already have the Vanguard Total Stock Market) and the director said, "wellll, I don't know, we already hold Vanguard..." and then I had to interrupt him and tell him that Vanguard is a company, not the actual fund.

It was all new to me so I wasn't getting too involved with the decisions, but I spoke up quite often and expressed my ideas as far as the market and how to look at the risk and returns of the management. One of the guys on the board thanked me for attending and said it was clear that I had an interest in the markets and had good insights and advice and that it was good to have me there since I had a familiar understanding with what the adviser was talking about.

Earlier in the thread, the book "Pension Finance" was recommended. Is that still the recommended book? I'm looking at buying it to better understand pensions and become more educated.

This sounds like a complete disaster for everyone involved. If it were me I would resign to absolve myself of any potential liabilty.

yeah I mean, sounds like having another person that's willing to voice opinions is good, but that didn't sound like a very healthy description of a pension finance meeting.

ItalianFX-
Sounds like a bad situation and does not sound like you are the right person to help fix it.
Get out IMO.

I'm sure he won't stop. This is a perfect example of the problem to begin with where people who should absolutely not be managing a pension's money will typically not stop because they are getting a paycheck.

Well, ok, I'll just come out and say it because it's really the only way it'll all make sense why I "care."

I am a representative from my department that the pension is for so I am personally affected by its performance (assuming I plan on relying on the pension 25 years from now -- which I don't get my hopes up. I have other long-term plans). The two of us are the only representatives from the department who sit in on the meetings. Nobody else is involved at all, except the 2 outsiders and a third person who works for the township.

I was nominated because mostly everyone knows I invest in the stock market, they know I have an Economics degree, and that I am, what they call, "the money man."

I can confidently state I am the most qualified person in the department to be on the pension committee, and knowing what I know now I probably wouldn't trust anybody else.

Worst case scenario, it continues the way it is. Best case scenario, I offer my input and we make progress.

But all-in-all, from my limited knowledge on pensions, it's a pretty tough hill to climb.

Knowing your posting history and also knowing you might be the most qualified person are terrifying thoughts to me.

I'm pretty sure you don't know anything about me and we'll leave it at that. Thanks.

Is there a written policy that sets out the overall target asset mix of the plan? The biggest decision to make is the asset allocation, not the selection of individual funds for each asset class.

This isn't necessarily a sign that anything is wrong. In a plan with a lot of retirees relative to contributing workers, the benefits going out will often exceed the contributions going in. This shouldn't be seen as an "oh no, how do we fix this issue", it's more of a "pension fact of life".

It's good to have written policy about how to do this, like if Fund X is in the lowest quartile performers over a two year period then they're fired. It's more dangerous to do this on a "how does everyone feel about this fund let's get a show of hands" basis.

Again, this goes back to the policy asset mix that should be in place. You don't look at whether or not you should be in an asset class based on it's performance over a few quarters. Make a call about asset classes based on the long-term risk/return profile relative to the liabilities. Then worry about picking best in class managers. You definitely don't want to be going "Hmmm, let's load up on commodities this quarter, let's switch to emerging markets next quarter because that's the hot item then, quarter after that let's get some bonds because the market it looking shaky."

Get people out of the mind set that there are winner vs. loser funds and the advisor is there to help him pick the winner fund. Worry about the liability growth, the asset mix, the exposure to risks under what if scenarios.

I mentioned this earlier in this thread but by far the most important and helpful questions you can ask are not "Should we by Fund A or Fund B this quarter". The best questions are:

1. What is our target asset mix? How was it selected?
2. With our asset mix what are the implications of good or bad market events?
3. Are our assumptions used to determine the contributions too optimistic, placing an unrealistic expectation on the fund to substantially outperform the market to cover liabilities?