Very few executives who were involved with pension funds when Pensions & Investments was started 26 years ago are still running funds today.
Most of those who ran pension funds in 1973 have long since retired, taking their knowledge and experience with them. One of the few still active is Russell L. "Rusty" Olson, director of pension investments worldwide at Eastman Kodak, Rochester, N.Y.
Rusty first became involved with the Kodak pension fund in 1971, and through the years he has built a reputation as a fund innovator, being among the first to adopt managed futures as an investment alternative, for example.
Now he has shared the lessons of his long experience with other pension executives in a book, "The Independent Fiduciary: Investing for Pension Funds and Endowment Funds, " published by John Wiley & Sons, New York.
It covers every aspect of managing pension assets. As anyone who knows Rusty would expect, the book is full of expert advice presented in a no-nonsense manner. For example, Rusty declares: "For stocks or bonds, an index fund should not only be our benchmark. It should also be our investment vehicle of choice unless we can find a manager in that asset class who we are confident will do better -- net of all fees and expenses." That is, the index fund should be the default way to manage the assets unless the pension executive is very confident, first of all, that some managers can outperform the index consistently over a long period, and that he or she has the ability to find one of those managers.
Obvious, yes. But how many pension executives look at the question of active vs. passive management in this way? Not many. Rather, indexing often is adopted only after the active managers selected have failed, over a long period, to outperform.
Another point: "I like arrogant investment managers whose performance history has earned them the right to be arrogant. By arrogant I don't mean rude or insensitive . . . By arrogant I mean, `I'm going to manage my portfolios my way, and if you like, I'll be glad to manage your portfolio, too. But I'm not interested in modifying my approach for a client.' " That's pure Rusty, and it's sound advice.
On the issue of private investing, Rusty declares the typical agreements that have been used through the years do not do a good job of aligning the financial motivations of the investment manager and the investors. He offers suggestions for how a performance fee can be constructed to align those interests.
Rusty's book is a compendium of common-sense approaches to virtually every aspect of pension and endowment fund management.
But perhaps my favorite part is Chapter 18. This is a chapter of brief comments that capture keen insights. For example, his explanation of the difference between gambling and investing: "Gambling is where the odds of winning are 50: 50 or less. . . . Investing is where (1) the odds are in our favor and (2) we have a long enough time horizon to take full advantage of those odds."
Another example: "Relative to investing, let's figure out what we don't know, then be sure not to base our investment decisions on what we don't know."
Another: "All things being equal, a manager with more keys on his piano should, over the long term, outperform a manager with fewer keys, and with more consistency . . ."
Rusty's book is so clear and concise that I will urge P&I's reporters and editors to read it. Whatever question they have about pension fund management will be answered by it.
