Here’s today’s news:
- The Abu Dhabi Investment Authority removed Spain from its sovereign bond index.
- The Qatar Investment Authority now owns more than 10% of Xstrata.
- Mubadala is completing construction on new spinal center in Abu Dhabi.
- Uganda is considering tapping its National Social Security Fund to finance infrastructure. Hmmmm. I’m not sure I approve, but I’m at least willing to listen to the argument for using pension assets in this way.
- The Queensland Investment Corp seems to be the winning bidder (though not the highest bidder) for Ohio State U’s parking meters.
- Mo’ money, mo problems: the North Dakota fracking edition.
- NJ Division of Investment is looking for 10 new EM investment “advisers” to help the fund make investments in the region. (Note: rules prevent the fund from giving mandates to external managers, which requires these sorts of ‘advisor’ workarounds.)
And here’s some solid material for your weekend reading:
Aleksandar Andonov, Rob Bauer and Martijn Cremers have a new paper entitled “Pension Fund Asset Allocation and Liability Discount Rates: Camouflage and Reckless Risk Taking by U.S. Public Plans?” It’s quite an interesting read, as it highlights the ridiculousness of the way US public pension funds calculate their liabilities and the bizarre (and irrational) incentives these calculations create for investment strategy. Here’s some blurbage to whet your appetite:
‘While all other funds adapt their asset allocations and liability discount rates to changes in maturity and interest rates in a way that is broadly in line with economic theory, U.S. public funds do not...our results suggest that over the last 20 years U.S. public funds uniquely increased their allocation to riskier investment strategies in order to maintain high discount rates and present lower liabilities, especially if their proportion of retired members increased more. These decisions by the boards of U.S. public DB pension funds have large economic effects and could have potentially severe future consequences.’
‘U.S. public funds are unique in not choosing more conservative asset allocations and not choosing lower discount rates as their client base matures. Instead, for U.S. public funds the proportion of retirees relative to non-retirees is positively related to the allocation to risky assets, with a 10 percentage point increase in the proportion of retired members being associated with an increase in the allocation to risky assets of more than one percentage point.’
‘...the typical policy of U.S. public funds is to set their liability discount rate equal to the expected return of the asset portfolio, where they have great latitude to posit what those expected returns are...U.S. public pension funds have made the economically surprising choice of not lowering their expected return estimates on risky assets as interest rates decline.’
That just seems completely irrational to me. But wait, here comes the punch line:
‘This behavior can be explained by the basic conflict of interest between current and future stakeholders of U.S. public pension funds. Current stakeholders, including boards, members and their representatives as well as politicians and taxpayers, have a direct incentive to underestimate the current value of the existing liabilities and transfer this risk to future generations. In this era of general underfunding, this will allow current members to receive higher benefits without boards and politicians having to make tougher choices now.’
Yes, these pension funds - these long-term investors - are as much to blame for the pervasive short-termism in finance as anybody else. And on that annoying note, I bid you fare well for the weekend.
