Should you invest like a pension fund?

Adam Jeffery | CNBC Christopher J. Ailman, chief investment officer of The California State Teachers' Retirement System.

Adam Jeffery | CNBC
Christopher J. Ailman, chief investment officer of The California State Teachers’ Retirement System.

With volatility in global markets persisting, investors and several entities, including pension funds, began pondering different investment strategies to protect themselves.

The California State Teachers’ Retirement System (CalSTRS), the second-largest pension fund in the U.S., recently considered shifting up to $20 billion of its assets—more than 10 percent of its $191 billion portfolio—away from stocks and real estate in favor of “safer” investments, such as long-term U.S. Treasury bonds.

The California Public Employees’ Retirement System’s (CalPERS) pension fund, the nation’s largest, is pondering a similar strategy, the Los Angeles Times reported Aug. 30.

And on Sept. 4, The Wall Street Journal reported that the New York State Common Retirement Fund, the third-largest by assets, was planning on cutting its assumed annual returns from 7.5 percent to 7 percent.


Financial experts are mixed about whether individual investors should consider a hedge similar to the pension plans.

“They couldn’t be more different in the number of people they serve,” said Charles Sachs, wealth advisor at Miami-based Private Wealth Counsel.

Pension funds serve hundreds and in some cases thousands of people, so an individual adopting the investment strategy of a pension fund would not be feasible, Sachs said.

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“There are important distinctions between pension funds and human beings that need to be considered,” agreed Howard Pressman, a financial planner at Virginia-based Egan, Berger & Weiner.

Pressman added that one of the main differences between retail investors and pension funds are in their objectives. “A pension fund’s main goal is to meet its payment obligations,” he said.

He added that many of these pension funds’ investment strategies are often too complex for an average investor to implement. “The ‘risk mitigation’ strategies may be advisable for a large pension fund run by sophisticated managers, but these investments tend to lack liquidity, be very expensive and are too complicated for retail investors,” he said.

Nevertheless, if the retail investor’s objective is to hedge against volatility in the short term, then a move away from stocks to bonds can be reasonable — depending on the investor’s age, said Craig Israelsen, executive in residence in the financial planning program at Utah Valley University.

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“If you’re 68 years old, this makes sense. If you’re 38 years old, not so much,” Israelsen said. “Stocks generate positive returns 75 percent of the time. That’s the batting average of equities. Fixed income has a batting average of about 95 percent … [but] the difference in the magnitude of those returns is quite sizable.”

Still, examining the investment strategies from pension funds can be beneficial for retail investors, said Scott Hammel, a financial planner at Atlas Wealth Advisors in Dallas.

“But they have to know what goal the particular pension fund is trying to accomplish to fully understand if their shift in favor of `safer’ investments is a reflection on the risk of the industry or a reflection of expected redemptions,” Hammel said. “Too often clients will look at another portfolio manager and not know how to correctly adapt the investment style for their own portfolio.”

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This is also something that’s going to continue, Pressman said, using Yale University’s investment model as an example. “Yale was heralded as the epitome of investment sophistication,” Pressman said.

From 2004-2007, Yale’s endowment posted double-digit returns, but in 2008, those returns declined to 4.5 percent and, in 2009, the university reported a 24.6 percent loss in the midst of the financial crisis. Even the top pension managers don’t get it right every time.

Regardless, Pressman said individual investors don’t need to mirror pension fund managers’ sophisticated strategies if they’re looking to protect their portfolios. They can do so simply by making sure their portfolios are well-diversified with a balance between stocks and bonds that fits their individual needs and goals.

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