American and European pension funds seeking place for their money

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Nikkei.com | 4.12.2012

American and European Pension Funds Seeking Place for Their Money

(Nikkei) The world’s pension fund money, which is centered in Europe and the U.S., is struggling. Ongoing slow growth and low interest rates have led to worsening savings shortfalls. Pension funds are hastening to find a new investment destination to stand in for slumping stocks, but they’re still groping in the dark. Governments, concerned for businesses struggling with cost increases, are starting to take steps such as regulatory easing, but there’s still no magic bullet. The plight of the “lost” pension money is like a distillation of the troubles in the larger western economies facing the possibility of a Japan-style long-term recession.

Shopping for farmland

In Rochester, Minnesota, soybean fields spread out like a green ocean. Farmland investment management specialist Marc Schober was very busy last summer hunting for good prospects in the area. He works for New York based investment firm Colvin & Co, which is setting up a farmland investment fund targeting institutional investors such as pension funds. “Recently we’ve been getting inquiries from pension funds almost every day.”

As Mr. Schober describes, it is noticeable that major pension funds such as the Ohio Public Employees Retirement System, the Swedish National Pension Fund are actively investing in farmland recently.

The world pension funds which mainly hold stable stocks for long time have begun to change their investment strategy. According to investment management advisory services firm Towers Watson, the total money invested in the pension funds of the seven most advanced nations amounts to about $26 trillion. While the percentage invested in stocks has slid from 61% to 41% over the past 10 years, in the same period “alternative investments” such as commodities, real estate, and hedge funds have increased their share from only a few percent to 20%. The flow of pension fund money into the farmland market, formerly the province of farmers and private investors, is emblematic of this trend.

The main driver of the trend is the prolonged investment slump. In the case of American public pension funds, yield for the past ten years has averaged 5.3%, far lower than the 7.7% target needed to meet payment obligations. An ageing population means that demands on plan assets are increasing. “It’s impossible to maintain sufficient funds just by keeping up with the market,” says Missouri State Pension Fund CIO Rick Dahl, whose uneasiness is shared by pension fund managers all over the world. There’s also a never-ending stream of pension fund frauds that promise fanciful returns.

Pension fund money is searching the globe for sources of higher returns. Last year Norway’s Sovereign Wealth fund, having set an investment target of 5% in real estate, bought property in Regent Street, London’s famous shopping district. Although the British economy is still in a slump, real estate is the exception, with a profusion of redevelopment plans in the works.

Hedge funds are the face of alternative investment. Their investment style, making use of short selling and short term trades, was thought of as an epigone of pension investments. But this summer a report by Citi Group predicted that by 2016, assets under hedge fund management would grow to $5 trillion, or 2.5 times their current value.

The results of pension funds’ alternative investments have been passable so far. In the case of farmland, at the end of last year the average total annual return over a 10 year period was more than 10%. Hedge funds were 6.5%. Both exceed the S&P 500’s 5% and play a part in keeping up investment yield.

But it’s unclear whether those achievements are sustainable. At about $2 trillion, farmland’s market capitalization represents less than 10% of the total value of the U.S. stock market (about $18 trillion). A mere 1% of pension fund money has already had a large influence on the value of farmland. Yale professor Robert Shiller is wary about the upward trend, calling it a possible bubble.

The impact on the stock market, traditionally the target for pension fund investment, has been severe. According to an analysis by Watson, there’s a possibility that over the last decade world stock markets have lost on the level of $5 trillion to alternative investments.

The dilemma for pension funds is that avoiding stocks may cause the market to decline and contribute to a value slump for their equity holdings. The U.S. stock market has started a recovery on the strength of easy monetary policy, but trading volume is hovering at half what it was ten years ago. The pension funds’ changed strategy is not unconnected to the imbalance in the stock market.

In the 1970s, everyone shared an optimistic outlook on the economy and corporate growth. In his main work, The Unseen Revolution, famed economist Peter Drucker called pension funds “the foundation of capitalism” because of their role as holders of more than half of corporate stocks. It’s been 40 years since then. It’s possible to see pension funds’ quietly continuing movement away from stocks as a hint of not only weakened growth expectations but also the beginning of a counter ”Revolution.”


Posted by Colvin & Co. at 12/4/2012

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