William Quinn, who juggles duties with American Beacon Advisors, American Beacon Funds, American Airlines and CIEBA, has a unique perspective on pension reform and investment strategies.
With more than 35 years in the business of defined benefit plans and finance, William F. Quinn is currently wearing several big hats:
He's the chairman and CEO of American Beacon Advisors, Fort Worth, Texas, which manages more than $48.4 billion in assets for a variety of clients, including the pension funds of American Airlines Inc.
He's a vice president of American Airlines in Fort Worth.
He's also president and trustee of American Beacon Funds, a mutual fund management company he founded that manages assets of more than $20 billion .
And in October, he's slated to add another cap to his professional wardrobe when he is expected to step in as chairman of the Committee on Investment of Employee Benefit Assets, a public policy industry group representing the nation's largest private pension funds.
In a recent interview, Mr. Quinn offered his views on the impact the new pension reform law will have on defined benefit and defined contribution plans, and outlined the investment strategies he has used to build American's assets. He also outlined some of his priorities for CIEBA.
Does the new pension law spell the end of defined benefit plans? The demise of the DB plan is probably overstated. I think we are going to see a dichotomy of events. Companies with unions have really not frozen or terminated plans other than if they're in a bankruptcy situation. The unions generally very much value … defined benefit plans as being preferable plans and will probably work with companies to preserve those plans. ...
I think in the non-union part of the world there probably is going to be a continued erosion of the number of companies offering defined benefit plans …. Non-union employees' plans are being frozen, converted to cash-balance plans or DC plans. People will start to, when they have that discretion, move away from (defined benefit plans).
What sort of change is American seeking to the portion of the pension law dealing with the funding of airline pension funds? We are seeking not so much the (same) amortization period, but the fact Delta and Northwest got to use a discount rate of 8.85%, whereas we're going to be required to calculate our underfunding based on a corporate bond rate, which is probably 6% to 6.25% today, creating a large inequity, and a very unfair competitive environment. The law is basically allowing them to defer large portions of these payments and cash flows, penalizing those airlines that continue to honor their obligations to their employees.
How has American's dedicated bond portfolio evolved? We implemented a dedicated bond fund in the early '80s when interest rates were 16%. We thought 16% was a good return on our investment. They were what you would call cash-matched dedicated bond funds for both our retirees and people approaching retirement. So the bonds that we held, the maturities and the interest payments came due at the same time we had cash requirements to pay those retirees.
In the later '80s, as interest rates came down from the 16% range more to the 11% to 12% range, many of those bonds were getting called and were unavailable. It created a problem of how to immunize your liabilities.
We converted to what we call long-duration bond portfolios. We had bonds with maybe half our portfolio but our duration would be 26 years and that would immunize our liabilities that were 13-year duration. So it was much more dollar-duration matching rather than cash matching and was a little more efficient.
As interest rates have declined from even those levels to the 4% and 5% and 6% range now, we have varied our hedge ratio. We sort of look at how much is our dollar duration vs. the dollar duration of our liabilities and how much do we want to hedge. We feel more comfortable hedging more at higher interest rates and less at lower interest rates. So we will adjust that hedge ratio on a periodic basis.
But clearly, having started this in the early '80s, we have been a large beneficiary of the decline in interest rates …. But on a bigger picture, it has helped to stabilize our funding ratio and our funding requirements because we were able to get appreciation in our assets that offset our increase in liabilities.
Does the move to alternative strategies make sense? There is a lot of money chasing these opportunities, so I think it's likely the historical returns that these asset classes have produced will be higher in the past than they may be in the future.
Having said that, they still may be very attractive relative to what we expect in the public markets and the more conventional markets going forward. So selectively looking at things that enhance return or reduce the volatility does make sense, in my opinion.
We are continuing to try to increase our private equity allocation, and the key … is being with good partners. If you can be consistently with first-quartile partners, you're going to do well. If you're with average partners, you're not going to do quite that well.
What do you think of hedge funds as a way to find non-correlated returns? We're not big believers in hedge funds for a couple of reasons. One is the hedge funds are structured (so) you can't control the risks. They generally have an opportunity to do whatever they want to do, from macro investing to shorting to other kinds of things. We don't believe that makes some sense.
Number two (is) the cost structure for generally public securities is very high. Long term you're paying 2-and-20 or 1-and-20 to these funds, and then you could have less return available to the investor.
And then, third, I think that area of the market, more so than any, is affected by both the dollars going into it and the brainpower. I mean, everybody wants to be a hedge fund manager. And over time the inefficiencies that existed historically are just being wrung out of the market. ...
What do you think your greatest contribution has been in overseeing American Airlines' pension funds? We clearly had an asset-liability management process in place since the early '80s when rates were higher and that has served us very well.
Number two, we have always embraced a value-oriented investment philosophy, not trying to be just like the market but consistently disciplined (in) finding managers. And that has helped us outperform and add a lot of alpha over the years, but also protected the downside in the bad market environments.
The third thing is once we do something, we usually do it in a little bit larger way than most people, and being in international investments and private equity and emerging markets — those three asset classes — we probably were early and larger in those investments. That helped us.
What are your priorities for CIEBA? I think one of the key ones is the continuation of trying to bring some sense into the accounting world, in FASB on recognizing that pension funds are long-term obligations and the assets we manage are long term. We shouldn't introduce undue volatility, and if that happens, there could be some consequences that would be continued reduction of DB plans. That's not good for the country. We think it's bad public policy. …
Number two is recognizing that DC plans are the wave of the future …. Automatic enrollment is a great first step. I think investment advice is another very positive thing that's going to happen. A third thing we need to do is figure out how to create low-cost effective annuities for people who retire because we can eliminate the risk of people outliving their money or not knowing how to take distributions based on their lifestyle. ...