Slow pension fund growth leads to risky propositions

The Insider

Your Money

August 01, 2004|By BILL BARNHART

OFFICIALS AT UNITED Airlines are musing about whether to discontinue contributions to the employee pension plans.

UnitedM-Fs pension fund is underfunded by about $7.5 billion, and the airline says it will stop contributing to the fund while it remains in bankruptcy.

The gap between your retirement income goal and your nest egg is less than that. But UnitedM-Fs problem reflects the peril of investment desperation.

Stock and bond markets currently are not generating the returns most people expected. As a result, the contributions you or your employer make to your retirement nest egg probably are too low at the moment.

What to do? Experts are peddling dozens of ideas aimed at making the best of a bad situation.

Commodities, unconventional stock market strategies, overseas investments, real estate, currencies M-y these concepts and more are being sold to ordinary investors as well as professional pension fund managers.

In essence, fiduciaries of pension funds are being urged to place greater trust in individual money managers and less in the market itself.

M-tWe are exchanging some market risk and putting more at risk with managers,M-v David F. Holstein, managing director for global public equities at $148 billion General Motors Asset Management, told a recent pension conference. GM wants retirement assets to work harder by holding fewer passive investments and giving rein to investment specialists who promise novelty.

The world of pension fund management is struggling as never before to cope with the challenge of individual skill vs. collective results.

Two approaches have emerged: Employ a broader array of investment managers, many engaged in previously untried strategies, or hire fewer managers and give them wider authority to chase investment opportunities.

In theory, either strategy will capture winning investment ideas without increasing the risk of the portfolio.

Alfred S. Bryant, a portfolio manager at Segall Bryant & Hamill, recommends tracking the riskiness of an investment manager just like you track the risk of stocks.

Over long periods, the variability of results (risk) by money managers tends to be stable, he found. If your mutual fund bounces from big wins in one year to big losses in another, it likely will continue to do so.

Knowing that, you can diversify M-y giving the risk-taking manager some slack while avoiding catastrophe M-y by adding a mutual fund with steady returns.

M-tMake sure you have mutual funds that are on both sides of the risk plane,M-v Bryant said.

But this new approach to managing managers implies greater trust in individual skill than many pension fund directors are willing to grant.

M-tWe get calls all the time from people who think they built a better mousetrap,M-v said J. Barry Mitchell, treasurer of electric and gas utility Exelon Corp.

Increasing the number of specialized managers? M-tThe problem is, the more narrow you get, the more it can equate to market timingM-v M-y a bad idea, he said.

Give managers greater leeway? M-tYou donM-Ft know what youM-Fre getting. We need to be able to make sure how they fitM-v into the overall plan.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoneytribune. com.

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