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WSJ: Pensions Making Riskier Bets in Quest for Better Gains

WSJ: Pensions Making Riskier Bets in Quest for Better Gains
(Stock Photo Secrets)

By    |   Wednesday, 01 June 2016 06:05 AM

Pension funds and other large endowments are taking bigger gambles in an effort to get a yearly return on their investments of 7.5 percent, which is considered reasonably strong.

Portfolio managers are “adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds,” according to The Wall Street Journal. “Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds.”

Twenty years ago, a bond portfolio could be expected to yield 7.5 percent a year with a likelihood that returns could vary by about 6 percent, according to research by Callan Associates cited by the WSJ. That kind of safe and steady return enabled pensions to cover the needs of beneficiaries.

“To make a 7.5 percent return in 2015, Callan found, investors needed to spread money across risky assets, shrinking bonds to just 12 percent of the portfolio,” the newspaper reports. “Private equity and stocks needed to take up some three-quarters of the entire investment pool. But with the added risk, returns could vary by more than 17 percent.”

After the 2008 financial crisis, the Federal Reserve and other central banks cut interest rates to record lows in an effort to encourage borrowing to stimulate the economy. But global production is flat or declining, while meager wage growth is capping consumer spending.

“The nation’s second-largest public pension plan, the California State Teachers’ Retirement System, has shifted a significant amount of money away from some stocks and bonds to protect against a downturn,” according to the WSJ. “It moved assets into U.S. Treasurys and so-called liquid-alternative funds, which mimic hedge-fund strategies. Calstrs, as the pension is called, reported gains of 1.5 percent during a choppy 2015, with returns on its fixed-income investments up just 0.6 percent.”

The outlook for stocks may help to boost pension funds.

Ed Yardeni, noted economist and Newsmax Insider, predicts the S&P 500 stock index will rise 10 percent in a year as commercial activity continues to expand.

“One of the questions is: ‘Is there a recession around the corner?’ And I don’t see it,” he told CNBC. He sees historically low interest rates, a stronger dollar, improving commodities prices and growing earnings as supportive to market gains.

The S&P 500 has risen 2.3 percent since the beginning of the year, reaching within 2 percent of its record high from May 2015. The stock benchmark has had two declines of more than 10 percent in the past year, with the most recent correction following the Federal Reserve’s December rate hike, the first one since 2006.

Stocks have rebounded by 14 percent from the February low, which Yardeni considered a significant level.

“We made an important low in February,” he told the network. “At the time, I said the market could be up 10 percent. I didn’t think it would happen by now.”

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Pension funds and other large endowments are taking bigger gambles in an effort to get a yearly return on their investments of 7.5 percent, which is considered reasonably strong.
pension, bond, risk, stock
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2016-05-01
Wednesday, 01 June 2016 06:05 AM
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