lowes, Editorial Director
Revisiting the past can be an eye-opening and illuminating experience.
As part of a special project, I have been looking back at the early days of Pensions & Investments. A couple of items caught my attention.
The first was the departure from International Telephone & Telegraph Corp.'s $1 billion pension fund of William Hayes, one of the industry's pioneers, late in 1974.
Bill Hayes, who was director-pension fund investments for ITT, led the industry in hiring nonbank investment management firms. In the 1971 Money Market Directory, his was one of only three pension funds to use more than one nonbank money management organization.
ITT and General Telephone & Electronics, both then in New York, and American Greetings Corp., Cleveland, each had three nonbank managers at a time when most funds, especially corporate funds, used banks exclusively as managers. In addition, ITT managed money internally.
Bill Hayes lost his job at ITT late in 1974, ostensibly because top management wanted no part of internal management, but probably because of the 1973-'74 bear market, and because he was a pioneer.
He disappeared onto Wall Street and might be retired now, but I would love to track him down to get his views of where pension management has gone.
The other item that caught my attention was the publication almost 23 years ago of Roger G. Ibbotson and Rex A. Sinquefield's seminal study of long-term rates of return in the stock and bond markets.
Almost everyone in the investment management business is familiar with the Ibbotson-Sinquefield study, and its annual updates by Ibbotson Associates Inc., Chicago.
Even individual investors are becoming familiar with the Ibbotson-Sinquefield figures as they are almost invariably cited in educational materials for 401(k) plan participants.
But most people have forgotten, as I had, that Messrs. Ibbotson and Sinquefield, besides examining historic returns also projected returns out 25 years.
So how close were they in their projections?
They appear to have underestimated equity returns and long-term government bond returns, but not too badly.
They projected that for the 25 years from Jan. 1, 1975, stocks would produce a compound annual return of 13.6%, a figure that raised skeptical eyebrows then. So far, with two years to go, large-cap stocks have returned 16.6%, compounded annually, while small-cap stocks returned 20.9% per annum.
They projected long-term government bonds would return 8.4%, when in fact they have returned 9.9%.
Their projections for short-term governments were spot on, however, at 7.1% per annum, while they overestimated inflation at 5.9% when in fact it has averaged 5.1% per year.
It's possible that over the next two years equity returns will be low enough to bring the actual returns down to meet the projected returns, but every investor should hope not. That would imply zero returns in the equity market for the next two years.
What does Ibbotson Associates project for the next 20 years?
According to its latest update of Stocks Bonds Bills and Inflation, the 1998 Yearbook, the median expected return on equities to 2017 is 12.1% compounded annually.
If the new forecasts are as close as the 1975 forecasts, no one, whether pension executive or 401(k) participant, will complain, even though those returns will be lower than in the past 23 years.
A 12.1% compound annual return would provide very comfortable retirements for lots of baby boomers who will be retiring beginning in 2010.