WASHINGTON - Oil and gas partnerships and funds that invest in bonds of financially troubled companies are especially attractive alternative investments, said William F. Quinn, president of AMR Investment Services Inc., DFW Airport, Texas.
The attraction of alternative investments lies in the 12% to 15% annually they can provide, compared with 7% to 9% in the stock and bond markets these days, Mr. Quinn said.
"Today, high-teen returns ought to induce us" to make such investments, he said, despite the inherent difficulties of investing in the equity and debt of privately held companies.
AMR Investment oversees the approximately $7 billion American Airlines Inc. pension fund.
He said oil and gas partnerships should log returns of 18% to 20% a year over a five-year period as production fails to meet the rising demand for energy in rapidly growing emerging markets like China and India.
One problem, however, is that investors buying into these funds can't sell their holdings the next day, as with stocks and bonds. Indeed, the average holding period is between 10 to 12 years.
Nor can pension fund executives easily discern how well managers have invested pension fund assets because it takes years to invest allocations, Mr. Quinn explained. These investments typically are set up as limited partnerships, with the general partners working off annual management fees of 1.5% to 2.5% of assets. Additionally, the general partners may stack acquisition and disposition fees on top, which can more than double the management fees. Most pension plans are making the general partners give back at least half of those fees, Mr. Quinn noted.
American has allocated about 5%, or $215 million, of its $4 billion defined benefit plan's assets to alternative investments - $15 million in venture capital funds, $55 million in real estate investment trusts, $25 million in distressed debt, and $120 million in buy-out funds. The fund aims to earn about six or seven percentage points above the Standard & Poor's 500 Stock Index, and is close to achieving its goal, Mr. Quinn says. Diversification, he said, is key to making money in alternative investment funds while minimizing the headaches. Other pointers include avoiding funds run by former chief executives of large companies who think they have what it takes to grow small companies and finding funds run by managers with a proven track record, and companies with strong managerial skills.