“Nobody puts baby in a corner” is the immortal line from Dirty Dancing, but it seems that by now, we have done exactly that to pension funds. For more than a decade, pension funds have been confronted with low expected returns for conventional assets and low interest rates in bond markets. And for more than a decade, they have got away with it thanks to booming equity markets. The chart below shows the expected returns of 69 US pension funds vs. the realised returns over the decade from 2010 to 2019 as analysed in a
What I find scary about pension funds current appetite for alternative investments is why are they investing in them really? Do they believe those investments are really going to provide superior returns despite the paucity of evidence for this or are they attracted to the opacity of valuations? It seems to me that with illiquid and difficult to trade investments there is the opportunity for the pension fund managers to make up pie in the sky valuations. This allows them to fiddle the returns they can claim to have made with made up numbers. This has already happened with superannuation funds in Australia. https://www.investmentmagazine.com.au/2020/04/more-pain-ahead-as-funds-writedown-assets/
What I find scary about pension funds current appetite for alternative investments is why are they investing in them really? Do they believe those investments are really going to provide superior returns despite the paucity of evidence for this or are they attracted to the opacity of valuations? It seems to me that with illiquid and difficult to trade investments there is the opportunity for the pension fund managers to make up pie in the sky valuations. This allows them to fiddle the returns they can claim to have made with made up numbers. This has already happened with superannuation funds in Australia. https://www.investmentmagazine.com.au/2020/04/more-pain-ahead-as-funds-writedown-assets/