Summary:Moderator Patrick Mitchell introduced the panelists, all of whom were currently or have been chief investment officers or managers of significant portfolios of retirement assets. Broadly framing the panel's issues, he noted that the U.S. population is rapidly aging and returns on pension assets have been negative for the past several years, bringing into question standard assumptions about the savings rates required to provide for retirement. In the U.S. and around the world, there is a clear need to find new sources of investment returns if the assumptions of pension plans are to hold.
The use of historical data to provide clues about future performance was the first issue raised by the panelists. The use of past data, Jim Berens noted, can be highly misleading. This point was amplified by Christianna Wood who further remarked that the standard historical benchmark — the data on returns provided by Ibottson — has been called into doubt and one could be no longer certain of the future returns of equities. Michael Rosen shed further light on the topic by decomposing the returns on equity into their respective components. Returns above inflation were due to two factors, he stated, dividend growth and price to earnings growth. Assuming 2 percent inflation and dividend growth at the rate of economic growth, it is hard, he contended, to see equities providing much more than 8 percent unless p/e ratios rise.
The nature of risk was the next question posed. Tom Shanklin stressed the importance of political risk to the Taft-Hartley market in which his firm is a leader while Lewis Coleman noted that for foundations the key concern was to minimize volatility and be able to make legally stipulated lending targets. The value of alternative assets with low betas was raised by Coleman and this was expanded on by Jim Berens. Hedge funds — his own investment vehicle — looked attractive he noted, but only due to the poor performance of traditional assets. They were simply, he quipped, the "tallest midget in the room."
Alternative assets remain a source of suspicion to Taft-Hartleys, Tom Shanklin argued, as do foreign assets. An example of what economists call "home bias," was the fear of unions that exporting capital was equivalent to exporting American workers′ jobs. Michael Rosen viewed the need to consider foreign assets on par with the need to consider broad economic trends and the need to find opportunistic investments as one of the three key issues institutional investors need to consider.
Patrick Mitchell closed the discussion by inviting the panelists to discuss whether the current climate was one in which further conservatism was best or whether it called for a more aggressive approach. Tom Shanklin stressed the need to be aggressive and noted that fixed income would not provide investors with the returns they needed. A good deal of portfolio rebalancing was wrongly delayed also, he argued. Unless ones′ views of asset classes have changed, one should still stick to ones′ investment strategy.
