U.S. public pension fund executives and trustees are honing their portfolios to ride the lower-return environment predicted over the next decade.
Dire market projections are coming from numerous investment gurus such as Jeremy Grantham, co-founder and chief investment strategist at Grantham, Mayo, Van Otterloo & Co. LLC. In a Jan. 3 investment perspective, he said the odds of a market bubble over the next six month to two years is higher than 50% and added that should that happen, the chances of a market decline of about 50% are "very, very high ... over 90%."
In mathematical terms, the return dilemma for U.S. public plans is obvious. The average assumed rate of return of the 100 largest U.S. public pension plans at fiscal year-end 2016 (the most recent data available) was 7.5%, according to Pensions & Investments data. But a composite forecast of the weighted annualized 10-year return of a diversified public plan portfolio was just 5.5%, based on P&I's analysis of asset class return assumptions from five major investment consulting firms.
Predictions of doom notwithstanding, U.S. public fund chief investment officers and their teams are for the most part maintaining existing investment approaches while tweaking portfolios to increase returns and efficiency, said observers.
"We're not seeing widespread panic, but we are hearing a lot of concern from (public) pension fund clients," said Jay V. Kloepfer, executive vice president and head of capital markets research at investment consultant Callan LLC, San Francisco.