Well, no one ever said we were prescient. During the past 25 years, the editors, reporters -- and readers -- of Pensions & Investments looked at trends in the markets and industry and tried to figure out just where we were headed. As it turned out, everyone took more wrong turns than right on specifics; and the journalists were wrong more than the industry participants even in generalities.
The P&I staff's forecasting skills are best summed up by one associate editor's comments in 1977 on the then-new investment approach called indexing: "You can't take these things seriously, can you?" More than 20 years and $1.7 trillion later, we take indexing seriously.
HANDS-DOWN WINNERS
The people with the best crystal balls on specific issues are Robert Arnott and Richard Boling.
In September 1986, when both were with TSA Capital Management Inc., the two wrote in a P&I feature article: "Portfolio insurance may someday cost institutional investors larger premiums than they anticipate . . .
"If the liquidity of the futures markets should become inadequate to meet the demands of the portfolio insurance strategies, the resulting futures mispricing could raise the cost, or 'premium' of portfolio insurance.
"In an extreme case, such mispricing could mean some 'insured' portfolios might not achieve their target floor return."
Just more than a year later, in October 1987, Messrs. Arnott and Boling were proved right.
For those who work on this publication, however, portfolio insurance provided an opportunity for us to be caught with egg on our collective face.
In several editorials in 1986, P&I came down on the side, albeit cautiously, of portfolio insurance. Most egregious, in hindsight, was the Oct. 27, 1986, editorial: "Expand portfolio insurance's use." P&I urged defined contribution plan trustees to examine the use of portfolio insurance for their beneficiaries. Our argument? "Members of defined contribution plans usually select fixed-income investments, often short-term investments and guaranteed investment contracts. This is apparently because they fear volatility, and the risk of loss in the stock market. Portfolio insurance can relieve that fear and encourage employees to put more of their assets into stock."
BIG PICTURE
For the best predictions overall, the honors go to George Russell.
Ten years ago, the head of The Frank Russell Co. predicted:
* Investors will become increasingly global.
* Derivatives markets will grow in importance, possibly surpassing cash markets on a global basis.
* Hedge portfolios will proliferate.
* Specialization in the money manager community worldwide will increase.
* The trend will be toward free market economies and away from socialism in China and the Soviet Union (the Soviet Union fell in 1991).
* Pension fund sponsors will exert increasing influence over the decision-making processes that govern their funds' investments.
* Defined contribution plans will replace defined benefit plans.
* Risk tolerance will be increasingly important in policy decisions.
* Consolidation among participants in the institutional asset management industry will increase.
* Large corporations will look to create an integrated pension planning process for their international subsidiaries.
In 1991, IBM Corp. announced an ambitious plan to try to do just that. The proposal was tabled in 1994, in part because of regulatory problems. But in 1996, the U.K.'s Inland Revenue took initial steps that ultimately could allow such integrated plans to exist.
HOW HIGH CAN IT GO?
No one anticipated how fast the market -- and the industry -- would grow.
In 1974, pension assets were projected to grow to $4 trillion during the next 25 years.
Only five years ago, experts forecast institutional ownership of the domestic equity market would reach 58% by 2003.
These predictions fell far short.
Today, U.S. pension assets exceed $7 trillion; and institutional investors already control 60% of the outstanding stock of the largest 1,000 U.S. corporations.
EXEC'S INSIGHTS
Even those closest to the action, couldn't see what really would happen.
In a November 1993 interview, DeWitt Bowman, then chief investment officer at the California Public Employees' Retirement System, talked about where he saw the giant public pension fund going. He batted .500 on his predictions.
* Prediction: Assets of the then-$75 billion fund would total at least $100 billion by 2003.
Reality: The fund joined the $100 billion club in the summer of 1996; this year, it topped $140 billion.
* Prediction: CalPERS would have fewer external managers.
Reality: As of June 30, 1993, 51 managers were identified for the defined benefit plan; 38 were identified as of Sept. 30, 1997.
* Prediction: It would do more private investing.
Reality: In March 1993, the fund had $870 million in private limited partnerships and private equity; according to data provided as of Sept. 30, 1997, the fund had $3.575 billion in venture capital and private equity.
* Prediction: The total equity allocation at the fund could hit 60% by 2003, but was unlikely to go higher.
Reality: As of Sept. 30, 1997, the pension fund reported 64% in equities.
AROUND THE WORLD
The investment management industry recognized early on how quickly the world of finance was shrinking.
Linda Quinn, director-division of corporate finance at the SEC in 1988, noted:
"There will have to evolve a regulatory system that recognizes issuers will want to issue worldwide and investors will want to invest worldwide. . . . In the best of all worlds, accounting and auditing standards will evolve that will allow issuers to prepare one set of information that could be used worldwide."
In 1997, International Accounting Standards were issued. While many in the U.S. still have problems with the international standards compared with the Generally Accepted Accounting Proce- dures, use of the IAS is growing worldwide.
Only five years ago, P&I was predicting pension funds would have 20% to 40% in non-U.S. investments by 2003; and that more international asset management would be done internally by pension funds because of computer program enhancements.
So far, pension funds aren't keeping that heady a pace.
In 1993, the top 200 retirement benefit plan sponsors had 6% of their defined benefit plans invested internationally. In September 1997, the top 200 reported 10% invested internationally.
But P&I wasn't alone.
John Carroll, then president of GTE Investment Management Corp., predicted large pension funds eventually would invest 25% of their assets overseas by 1998, up from 3% in 1988.
While shy of the 25% mark, Mr. Carroll was pretty much on the mark on his other predictions:
* There would be increased use of "portfolio modeling," looking at aggregate characteristics, and hence, an increased use of quant systems (beyond plain indexing).
* Much of the quantitative investment work would be done internally at pension funds (although he was off on his prediction that half or more of assets of large funds would be managed internally).
* Defined benefit plans would be less important, and wouldn't expand in number.
* Public funds would be important in trend setting because the amounts of money they put into anything would be a major influence on how segments of the markets react.
CYBERSPACE
In 1980, when the words cathode ray tube sounded like something out of a science fiction nightmare, Ed Madden, then a vice president with Chase Manhattan Bank, held forth on the impact of technology on the master trust business. He said:
"The ultimate future in this business is that the plan sponsor will sit in his office with a series of CRTs and a printer. This plan sponsor will communicate with us via satellite.
"For all in-house managed money, he is going to do all the input; he is going to update the systems. At any given moment he is going to be able to take his portfolio, automatically fully price it, automatically get an instantaneous performance measurement . . . and instantaneously do all kinds of portfolio analytics . . . He will automatically be able to do graphic displays."
In the next 16 years, Mr. Madden and others were proved right. The dominance of computer systems in the industry -- and the astronomical costs of updating those systems -- played a major role in the consolidation of master trust banks.
KNOW YOUR COMPETITION
Nobody knows like those in the know. At least that's how it seems when you go back to the Jan. 21, 1991, issue, where the winners of the 1990 Nobel Memorial Prize in Economic Sciences -- Harry Markowitz, Merton Miller and William Sharpe -- predicted who would win the award in the future.
They named Myron Scholes, Fischer Black, Robert Merton, Eugene Fama, Stephen Ross and Richard Roll.
"All will eventually make it now that the ice has been broken," Mr. Miller said at the time.
So far, they're about half right.
In 1997, Messrs. Merton and Scholes were given the award for their work in options pricing. Mr. Black, who died in 1995, was given prominent credit in the citation. In referring to the pioneering work, the citation continually referred to "Black, Merton and Scholes." One observer at the time said that had Mr. Black been alive in 1997, he "would have certainly shared in the prize."
HITS AND MISSES
Predictions in other areas abound in the pages of P&I from the past 25 years.
On mutual funds: In 1993, it was projected that by 2003, mutual funds could supercede pension funds.
At the time, mutual funds were growing at an annual rate of 20%. If that continued for 10 years, P&I predicted, mutual funds would have $8.2 trillion by 2003, while pension funds would have $8 trillion, based on their 7% growth rate.
At the Investment Company Institute conference this May, mutual fund assets were put at $4.5 trillion, reflecting a more modest growth rate of around 14%; pension assets, meanwhile, stand at around $7 trillion.
Experts were correct, however, when they predicted consolidation in the industry. Starting in 1992 with the Franklin Resources and Templeton union through last year's Zurich Group/Scudder Stevens & Clark marriage, mutual fund companies have been finding strength in mergers.
On real estate: In 1993, pension funds averaged 3% to 4% of total assets in real estate; by 2003 P&I projected it would be 7% to 8%.
That isn't happening. As of Sept. 30, 1997, the average allocation to real estate equity among the defined benefit plans of the nation's top 200 plan sponsors was 3.6%; to mortgages, 0.6%. The average for defined benefit plans among the 1,000 largest sponsors: 3.4% real estate equity and 0.6% mortgages.
On LBOs: In 1988, at the height of the LBO feeding frenzy, Lester Pollack and Ali Wambold of Lazard Freres & Co., wrote: "The leveraged buyout is a sound idea for certain companies. The vehicle is being misapplied increasingly, however, because it has been successful, because it has become Wall Street's most lucrative activity and because investors are mixing issues of capital structure and issues of corporate control, management effectiveness and management compensation. In the next 15 years, investors will become disabused of the impression of solidity and virtually universal applicability of this acquisition technique."
For 1988, P&I reported LBO deals totaled $37.2 billion; in 1997, the total was $28.73 billion.
ADVISERS DOOMED?
The future of the investment management business has been a topic of concern for P&I and its readers since the beginning.
"The investment management area is a relatively young one, and the opportunities for growth are enormous," a P&I editorial stated in 1974. ". . . we suspect the industry will be one of dynamic growth in the next 25 years. It can hardly fail to be."
But in the early days, there was concern that the fiduciary requirements of the Employee Retirement Income Security Act were a barrier to the entry of creative people into the money management field.
In a 1975 editorial headlined "ERISA threatens smaller management firms," we wrote that the requirements, which seemed to direct pension sponsors toward well-established, well-capitalized firms and away from smaller, entrepreneurial managers, "may be too high a price to pay for the positive aspects of ERISA."
And again, a year later: "One of the most disturbing side effects of ERISA has been its impact on the entry of new investment management talent into the money management field.
"According to consultants, there has been a distinct decline in the rate of formation of new money management firms in the two years since ERISA was passed and signed into law. . . . One consultant argues that the firm likely to develop into the new T. Rowe Price or David L. Babson Inc. will still get started and will survive. . . . We are not so sure. We think it is more likely that some extremely capable people will be forced out of the pension industry."
Whether ERISA scared some people away people is not known. But more than 750 firms responded to P&I's annual survey of money managers of tax-exempt funds in May.
Another great cry of doom for asset managers was voiced with the advent of defined contribution plans. P&I in March 1989 predicted correctly that rather than sounding the death knell, defined contribution plans would be another source of income for managers.
"The gloom pervading the institutional investment management industry is unjustified. Managers say the growth of the pension fund industry is over. They are misreading the signs. Defined benefit growth has slowed dramatically, but defined contribution plans continue to grow rapidly. . . . Defined contribution plans need money managers, too. They are a different market. They need additional services . . . but they are a growth market.'
