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Investing in Today’s Market
How Are Your Peers Coping with the Current Funding Environment
Joanna Bewick, CFA
Vice President, Strategic Services
Fidelity Investments
Active vs. Passive Investing
David M. Blitzer, PhD.
Managing Director
Standard & Poor’s
 Joanna Bewick reviewed the key findings from research conducted by Fidelity Investments and Plan Sponsor magazine. The data confirm that the much-anticipated funding crisis has arrived. More than half of all public plans, and almost half of all pension plans (public and private) are underfunded.
The research, published in Plan Sponsor, was conducted primarily in a web-based questionnaire from July 11, 2002 to August 2, 2002. Additional surveys were conducted by phone and fax. The total number of respondents was 205, and included almost one-fourth of the $19 billion pension plans.
Bewick reported that 83% of public plans surveyed use an investment management consultant, and 92% of them are positive about their consultants’ advice. Only 9% noted compensation is tied to investment performance. An overwhelming 79% believe it would be inappropriate to tie their compensation to performance, given the limited control they have over their plans.
Following are the funding status key findings:
- 54% of public plans are underfunded;
- 18% of public plans are less than 75% funded;
- 90% of public plans have conducted funding studies within the past year;
- 85% expect to make contributions in the next 12 months.
The research also revealed several asset allocation key findings:
- 81% of public plans allocate assets using a strategic asset allocation strategy;
- 70% construct their allocation using primarily active strategies;
- 42% consider liabilities funding status to be the primary driver of plan risk level;
- another 33% consider return targets to be the primary driver of plan risk level;
- 72% link assets to liabilities.
The authors will conduct their next survey from June 20-July 4 on www.plansponsor.com.
Where are pension managers putting their funds in the current climate of uncertainty? David Blitzer said that for many fund managers the choice is between an active or a passive investment style. However, he said he believes it would be better to consider the choice to be between active and “intelligent” strategies.
Research shows that three out of every five index funds consistently outperform managed funds. Contrary to popular belief, Blitzer said, index fund performance relative to actively managed fund performance is essentially the same in a bear market as it is in a bull market.
Blitzer, who is chairman of the S&P 500 Index Committee, noted that one attractive feature of some indices during the dot-com bubble was that many excluded some of the more volatile (and many of them now bankrupt) businesses. Indices, for example, can exclude companies that fail to consistently show a profit. Many dot-coms never met this criterion because they never made a profit, much less meeting a common index fund requirement of four consecutive profitable quarters.
“Intelligent investing” costs are often much lower, Blitzer noted, than the average costs for actively managed funds. “When average rates of return exceeded 25%,” he noted, “pension managers could afford to be less concerned with expense ratios.” Today, however, the much lower average rates of return make the low expense costs of index funds an even more attractive feature.
Bewick leads a team of investment analysts that conduct plan-wide, portfolio-specific, and risk management projects for public and corporate pension funds, endowments and foundations. She has also worked for a leading investment firm where she was responsible for making buy, sell and hold recommendations for various bond and money market mutual funds.
Blitzer is a member of the Standard & Poor’s Investment Policy Committee and the Standard & Poor’s Economic Forecast Council. He has also served as a consultant with various government and private sector agencies including the New Jersey Department of Environmental Protection, the National Commission on Materials Policy, and Natural Resources Defense Council.
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