Saturday, August 29, 2009

Endowments, pension funds and other perspectives

I find myself puzzled, by markets that seem to be, after a brief trip through rational pricing, reverting to their bipolar ways and I am puzzled by the investing infrastructure, the social and political networks that make investment decisions.

I expect to be puzzled by markets, they are, after all, strange voting networks that only haphazardly measure value. No, what puzzles me more are institutions, like public pension funds.

I met with the CIO of one last week, and he seemed perfectly nice, and absolutely clueless. To be fair, he's probably not clueless, it's just that his perfectly normal priorities "keep my job", "don't get fired", etc. force him into an asset allocation that is clearly suboptimal for his members. He is invested in public and private equities, plugged into a few funds that charge him "2 and 20" and absolutely unable to pick something different from the current mix of his peers. Because if he picks something "different" and underperforms he gets fired, if he "picks" an allocation that performs poorly but just like his peers, then not.

Which all makes sense and at the same time makes no sense.

I was at the gym this AM and someone had left a copy of Middlebury magazine (for alums I presume), I didn't get the date but it included a report from the poor guy who is responsible for managing (or at least directing) Middlebury's endowment and in a lovely graphic, off to one side it said (I paraphrase) expected average annual returns 9%.

I'm sure Middleburyians are well connected and well advised. They are probably well spoken and have all learned gravitas at their mother's knee, but I find it astonishing that they can throw out such a number with so little compunction. Maybe if they added the footnote ( ± 12%) it would help their graduates understand the roller coaster ride to which they are strapped. Maybe it could look like the calorie disclosure on a package of cereal, "Contents: Fees (FAT) 4% - Note: portfolios containing fees greater than 1% are likely to suffer poor portfolio health"

In the absence of further discussion I find the combination of career biased portfolios and mean value return estimation (biased) to be confusing. But , on futher reflection maybe it's not. Maybe the real message is terribly clear, in a world of too much leverage where expenditures have been based on spending the present value of future earnings (long before they have actually been earned) maybe in that world the real story has been well written, assume a sunny disposition and don't ring the alarm bell, it scares the horses.

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