The graphic comes from the Boston Globe with a tip o the cap to Rolfe Winkler from Option Armageddon. You can click on the chart for a better look. Rolfe did a write up on the PGBC's prospects and it is a good albeit glum read. Here is something Barry published that is written by Jack McHugh that questions why the PBGC is even in the stock market, the Globe's coverage and Randy Forsyth's take.For purposes of this blog I am more interested in what can be learned from the allocation.
What I like about the "New Target Allocation," that we don't often see with these types of funds, is the small allocations to the narrower market segments seen at the bottom of the chart.
Diversifiers are great in moderation but so many large pools of capital put huge weightings in commodities, absolute return or illiquid investments and that works most of the time but as we saw in 2008 when it did not work the results were budget altering.
The 22% now allocated to long term treasuries would seem to be a big red flag. If rates go up a lot then that part of the portfolio will drop precipitously in value and the income stream at that time would be way below the prevailing market--hopefully for the fund's sake they realize this threat and are hedged one way or another.
It is interesting that 25% in is foreign equity (19% developed + 6% emerging) versus only 20% in domestic. The commitment to foreign equity makes sense to me but then it is difficult to reconcile there being almost no exposure to foreign debt. The TIPS exposure would obviously help mitigate some of the loss of purchasing power of the dollar if that seemingly inevitable consequence comes to pass but more exposure to foreign debt would also help in this regard.
Although not broken down in the graphic it would be interesting to see how they construct the equity portion of the portfolio. It is not clear from the nitty gritty that I was able to find whether the equity portions will be actively managed or indexed. It reads like active managers will be selected but it does say "index strategies will be considered."
To the extent someone wanted to, the PBGC allocation is easily recreated with ETFs. While I would leave one or two things out I would, again, want some foreign sovereign debt. The biggest omission appears to be commodities and while not a glaring omission I am a huge believer in absolute return which also appears to be missing.
8 comments:
Hey, Roger. Is there a stated objective for the new target allocation of the PBGC's funds? For their purposes, I suspect preservation of capital is still very important, hence the large weight in treasuries...
if you read any of the other links, you will see that PBGC increased the equity allocation in 2007 to give it a better shot of running out of money so soon which of course was bad timing by a year or two or unknown.
not running out
sorry
Isn't the big allocation to long-dated Treasuries just a textbook matching of long-term obligations? It likely will suck in the short term but they want to know that on a certain date they'll be getting back a certain amount of money.
Roger, you may have said this before. Do you consider the new hedge fund ETF QAI to be an absolute return product, meaning that you would expect it to go up/down less than the S&P 500? Thank you.
I wrote about QAI for TheStreet.com.
I do believe the intention is to offer a smoother ride but I am not sure it will be dramatically smoother. My conclusion in the article was give it a few months to show how it actually does.
It uses double short ETF but the backtest predates double short ETFs.
John,
while there must be truth to that it is also true that they did reallocate in an effort to avoid problems. the heavy exposure to LT bonds seems to work against the idea.
This is a nice example of how to learn by others mistakes: The allocation of PBGC is nothing extraordinary -- a hybrid mutual fund or institutional endowment wouldn’t be terribly out of line by using it although they could probably do better -- but the allocation is rather grossly mismatched to purpose and therein lays the rub.
Given its primary mandate as an official pension insurer the management of PBGC does not appear to have focused on their essential fiduciary duty or even common sense in re-allocating such large percentages of their portfolio to higher risk assets. The reason for a high percentage of highest quality LT bonds and other instruments with relatively predictable returns is to insure against anticipated cash flow and liability requirements on a quarterly basis based on actuarial statistics and potential for unanticipated drawdown as far out in time as feasible (30 years and more). After that requirement is satisfied there be some latitude in seeking higher return in more volatile assets but that latitude is probably not great, certainly nothing like the allocation in that chart.
The possibility of ‘running out of money’ thirty or more years in the future is something that can be planned for and, rather obviously, a government agency has options that ordinary citizens or corporations do not, but the possibility of running out over the next 1, 2, 3, 4, 5 years etc. is another matter entirely.
So while it was certainly imprudent, the question of whether the 2007 PBGC reallocation represents mis- or mal-feasance will probably be answered relatively soon, within the next couple years I'd guess: PBGC will either need to be bailed out because it cannot meet cash flow requirements for its shorter-term liabilities or it will not; under more mature and responsible supervision it may recover thereafter.
Robust allocation is a good thing, matching it to purpose (and legal mandate) is critical.
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