Pension Funds Pile on Risk Just to Get a Reasonable Return

An investor used to get a 7.5% return by holding safe bonds. Now, three times more risk gets you the same returns as twenty years ago, research finds.

What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns.

The WSJ reports: Thanks to rock-bottom interest rates in the US, negative rates in other parts of the world, and lacklustre growth, investors are becoming increasingly creative—and embracing increasing risk—to bolster their performances.

To even come close these days to what is considered a reasonably strong return of 7.5%, pension funds and other large endowments are reaching ever further into riskier investments: adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds. Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds, according to new research.

In 1995, a portfolio made up wholly of bonds would return 7.5% a year with a likelihood that returns could vary by about 6%, according to research by Callan Associates Inc. To make a 7.5% return in 2015, Callan found, investors needed to spread money across risky assets, shrinking bonds to just 12% of the portfolio.

Private equity and stocks needed to take up some three-quarters of the entire investment pool. But with the added risk, returns could vary by more than 17%.

The amplified bets carry potential pitfalls and heftier management fees. Global stocks and private equity represent among the riskiest bets investors can make today, said Jay Kloepfer, Callan’s head of capital markets research.


“Stocks are just ownership, and they can go to zero. Private equity can also go to zero,” said Mr. Kloepfer, noting bonds will almost always pay back what was borrowed, plus a coupon. “The perverse result is you need more of that to get the extra oomph.”

“Not nearly enough attention has been paid to the toll these low rates—and now negative rates—are taking on the ability of investors to save and plan for the future,” BlackRock Inc. Chief Executive Officer Laurence Fink said in a recent letter to shareholders.

While some investors are loading up on traditionally risky assets as a way of hitting ambitious targets, others—concerned about a slowing global economy—are wrestling with how to reduce risk without piling into bonds.


In the current, volatile market climate, it is ever important that investors are fully aware as to how their investment or pension is being managed.

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Structured notes or alternative, esoteric investments such as property, or infrastructure investments which promise an attractive return, sometimes as much as 10% a year, not only under-perform markets but pose a significant risk to a your entire investment or pension (not to mention the hidden charges and penalties).

Wouldn’t you prefer to have your investment or pension professionally managed by a qualified, UK FCA regulated discretionary investment manager with 100 years of investment experience, without hidden charges or penalties?

Click here to learn more.



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