The past 12 months should have driven home a key investment lesson: Risk and return are like twins - they are rarely found far apart.
However, greed apparently causes many investors to forget just how close the relationship is. As one grows, so does the other.
Return is the good twin, giving investors a reward for surrendering their capital to others for a time.
Risk is the evil twin, threatening to consume the capital so it can't be returned to its owners when it is due.
The fact that the two usually are found together was reinforced on at least a half-dozen occasions in 1994, beginning with the collapse of Askin Capital Management and ending with the Orange County investment pool disaster.
In virtually all of these cases, investors were pursuing above-market rates of return with what they believed were strategies that eliminated or greatly reduced market risk.
But risk and return are twins not easily separated at birth. Anyone who attempts to sell to an institutional investor an investment vehicle that purports to successfully separate them for more than relatively brief periods is either a charlatan or a fool. Any institutional investor who buys such a product expecting long-term above-market returns with little or no risk certainly is a fool.
Most investment professionals are not fools. Few trustees of pension funds or other institutional investment pools are fools either. But greed can bring on amnesia.
For a time the evil twin is forgotten, while the good twin is feted. And risk often conveniently stays out of sight for a time.
This is what happened with Askin Capital and the Orange County affair. For some time the investors saw only positive return from the investment strategies, and so they forgot about the risks.
Indeed, the above-market returns earned by Orange County's then-treasurer, Robert L. Citron, who resigned in December, went on for several years, and few voices were heard complaining that Mr. Citron was ignoring the risks.
Only his rival in the most recent election for the treasurer's office, John M.W. Moorlach, can claim credit for that.
Mr. Moorlach, in effect, warned the evil twin was merely hiding and eventually would step forward to spoil the party - as indeed it spectacularly did.
Interestingly, few significant pension funds were caught up in any of the financial disasters of 1994, although a few had small amounts in Askin Capital's portfolios through pooled vehicles.
Pension funds might have avoided the disasters because of the conservatism encouraged by the Employee Retirement Income Security Act; by the professionalism and experience of their staffs; and by the oversight generally built into their structures.
Under ERISA, the fiduciaries are personally responsible and financially exposed if something goes wrong on their watch. They have an added incentive to look around carefully to see where the evil twin risk is lurking when they find return attractive.
Nevertheless, pension fund executives and trustees should take the time to study the disasters of 1994, even though they apparently avoided them. By studying them they may, like generals studying disastrous campaigns of the past, learn from others' mistakes and misfortunes.
If nothing else, they may learn more of the guises under which the evil twin hides.
