As the first anniversary of the horrific events of Sept. 11 approaches, those in the financial industry, while remembering and honoring those who lost their lives in the terrorists' attacks, also must look forward. Investment, particularly investment of pension, endowment and foundation assets, is an act of faith in the future.
Recovery from last year's atrocity can never be complete. What might have been will never be. As the nation has sought to return to business, the rebuilding, emotionally and physically, has been complicated by the crisis in the markets. This crisis was sparked by the bursting of the Internet bubble and worsened by the scandals at Enron Corp., Tyco International Ltd., WorldCom Inc., Arthur Andersen LLP, Salomon Smith Barney, etc.
These events devastated pension programs to the point of wiping out some participants' 401(k) savings. They also damaged the assets of foundations and endowments.
The events serve as a reminder to everyone in the investment community: The first responsibility of investment managers is to the people in whose benefit the assets are invested. Yes, the primary measure of performance may be investment returns, but all must look behind that performance to ensure investments meet their long-term goals.
That implies intelligent risk management. Long-term retirement programs, particularly those backing defined benefit plans, shouldn't lock up assets in risk-free securities. Taking risks is the only known way of securing and enhancing retirement income.
"Part of responsible risk management is forcing yourself to think the unthinkable," Keith P. Ambachtsheer, president of K.P.A. Advisory Services Ltd., Toronto, noted more than a year before Sept. 11. "Implausible scenarios?" he asked then. "Maybe. But remember the hapless folks who saw no risk in 1929. ... They were wrong, and they suffered the consequences for an entire decade."
In a short time, the U.S. stock market went from an unprecedented string of 20%-plus returns to double-digit losses. The federal budget went from billions of dollars in surplus to a deficit projected by one analysis at $178 billion for 2002 and higher for 2003. The nation went from a sunny late summer morning to the horror of the terrorist attacks and a protracted, costly and uncertain war on terror.
But investors must keep in mind that worst-case scenario doesn't mean pessimism. That would promote the thinking that caused many investors, especially some major public pension systems, to ban equity and even corporate fixed-income investments decades ago, at a tremendous cost in the opportunity loss of missed bull markets.
Now, the markets are still roiling from corporate and Wall Street malfeasance, but they are quickly trying to reform. There are new regulations and independent efforts to improve financial reporting accuracy and transparency. Corporate governance is getting new vigor, including recent calls for open access to corporate proxy ballots for dissident candidates for directors, and new seriousness about aligning executive compensation with the interests of shareholders, including a call by the Investment Company Institute for expensing stock options.
But pessimism still holds in some circles, such as the effort to prevent the partial privatization of Social Security. Opponents are correct to worry about how the stock market drop in the last two years would have harmed Social Security beneficiaries. But they fail to point out the positive returns of the markets in the long term, or that Social Security has been anything but secure. They fail to point to the meager return or how many of us now are required to wait beyond age 65 to acquire Social Security's full benefits in an effort to shore up its finances. It is harder to reform the government.
Abby Joseph Cohen, managing director and chairman of the investment policy committee, Goldman Sachs & Co., New York, noted in a recent analysis, "Many professional managers are concerned that a premature re-entry into the equity markets could be a poor business decision, especially if clients are disheartened by short-term performance." That is the mirror of the attitude in 1999 and early 2000, she noted, when "many investors were reluctant to reduce equity exposure while stock prices were rising."
Investing is never easy. But investors, nevertheless, must continue to take appropriate risks.