Update: Boeing Pension Plan Performance

The pension plan of Boeing Company has returned 10% in 2012.  The mark for the plan is 7.75%.  The plan has $51 billion in assets.  To achieve its return, the asset allocation is as follows:

• Fixed Income - 53%
• Global Equity - 26%
• Private Equity - 6%
• Real Estate/Real Assets - 6%
• Hedge Funds - 5%
• Other Global Strategies - 4%

The source for this article can be accessed here.

Boeing and Ford Run Pension Plans Well

Two weeks I saw a post on allaboutalpha.com that listed the best corporate pension fund managers.  It was written by Charles Skorina and compared their performance with the more visible public pension funds and endowments in the US and Canada.  Looking at five year returns, the companies with the best returns are Boeing, NorthrupGrumman, Ford and AT&T.  All were above 5.4% for 2007 - 2011.  Harvard Management's return for the same period was 5.6%.  A simple 60% equities / 40% bond portfolio would have returned 3.2%.  The four corporations earned these returns with less risk - as measured by Sharpe ratios.  The only public plans to rival them were Alberta Investment Management Company (AIMCO) and Columbia University.  Harvard Management's Sharpe Ratio was well below the leading plans.  Surprisingly enough, financial services firms Bank of America and General Electric ranked among the worst.

The source for this article can be accessed here.

Investors Uncertain about BRIC Countries

Many investors believe that any future long term stock market performance will be driven by the BRIC (Brazil, Russia, India and China) countries in the emerging world.  Opinions on the short term outlook have changed.  There is a split among managers due to the continuing Eurozone crisis and slowing global growth.  The returns for the four countries are less than the MSCI Emerging Markets index which has underperformed the MSCI World index by 834 and 124 basis points for the past one and three years through May 31.  Below is a table comparing each country's return versus the MSCI Emerging Markets index for the same time period.

BRIC Country	One Year Return	Three Year Return
Brazil	-823 bp	-703 bp
Russia	-1,130 bp	-544 bp
India	-802 bp	-785 bp
China	-24 bp	-540 bp

The managers on either side of the trade are:

Pro

Richard Titherington, managing director and chief investment officer for emerging markets equity and JP Morgan Asset Management ($33 billion in assets under management) is aggressively overweight China and sees the pullback to lower valuations as a buying signal.

Allan Conway, head of global emerging markets equities at Schroder Investment Management $23.2 billion in AUM); Manu Vandenbulck, senior investment manager and ING Investment Management ($3.3 billion in AUM); Christian Deseglise, managing director and head of institutional sales in the Americas for HSBC Global Asset Management ($32.2 billion in AUM) and Gary Greenberg, head of emerging markets at Hermes Fund Managers ($740 million in AUM) are overweight China.  They are relying on China's government to cushion any economic downturn.  The lower valuations of the Chinese stock market lessen market risk.  The BRIC countries are becoming non-correlated with the developed world.

Gaurav Mallik, portfolio manager for global active quantitative equity at State Street Global Advisors ($6 billion in AUM), is buying smaller companies in Russia and China.

Con
Todd McClone, portfolio manager at William Blair ($9 billion in AUM), says that lower commodity prices, the Eurozone crisis, inflation and slowing economies are negatively affecting the markets in BRIC countries.

Paul Bouchy, managing director and head of research at Parametric Portfolio Associates, is underweight BRIC and overweight in the frontier countries.

The source for this article can be accessed here.

How Hedge Funds Perform When the VIX is High

In a recent article  published in the Alternative Investment Analyst Review, Mikhail Munenzon, CFA, CAIA, PRM and Director of Asset Allocation and Risk at the Observatory, researched how different hedge fund strategies performed during periods of volatility over twenty years.  The data came from the Center for International Securities and Derivatives Markets Indices.  The strategies covered were convertible arbitrage, distressed, merger arbitrage, commodity trading advisor, macro, equity long/short, equity market neutral, emerging markets and event driven.  He looked at the indices for traditional assets too:  S&P 500 Index, JPM Morgan Aggregate Bond Total Return Index, SP GSCI Commodities Index and the FTSE EPRA/NAREIT US Total Return Index, a real estate index. Volatility was measured by the VIX index from 12/31/91 to 1/29/10.  Munenzon created six categories:  less than 20, 20-25, 25-30, 30-35, 35-40 and more than 40.  The VIX was under 30 90% of the time and under 20 50% of the time.  Based on the data, it does not jump randomly from being quiet to being volatile.  They remain calm or volatile at times and remain so for the near future.  Each index's return was analyzed during the same timeframe.  Here are the most important points:

• Only four of fourteen indices had positive returns in all conditions:  commodity trading advisor, macro, equity market neutral and JPM Morgan Aggregate Bond Total Return Index
• Superior long term performance of hedge funds are due their ability to limit their losses during times of market stress due to unconstrained investing.
• This affirms an earlier study by Welton Investment Management stating that macro and commodities are the two strategies that are not correlated with the stock markets

Please note that data is based on indices.  Individual portfolios of funds may have different results.

JAT Capital: Fund Tries to Keep a Low Profile

Hedge fund JAT Capital did not report its performance through mid-October to HSBC Private Bank.  You may ask what is interesting about that.  An earlier article mentioned some reasons that a fund may not continue to report its returns.  It's interesting because JAT Capital, through September, was up 31% for the year and had the best returns in HSBC's rankings.  The average hedge fund has lost 5% in the same period.  John Thaler, manager of the fund, may be trying to keep a lower profile or may not need any more capital raised.  The long/short equity fund has $2 billion in assets under management.  That may be the limit at which his investing strategy is successful.

The source for this article can be accessed here.

Real Returns

The website www.finalternatives.com has an interesting article by Charles Gradante, Managing Principal of the Hennessee Group.  He writes that most people evaluate investments based on nominal returns and not real returns.  Real returns are equal to nominal returns less inflation.  He refers to two Standard & Poor's charts.  The first one displayed the annualized performance of the equity markets in 10 year period beginning with 1970.  The 70s had a negative real return of 1.48% as inflation was higher than the return of the equity markets.  The 1980s and 1990s returns above inflation were 12.48% and 15.29%.  The last decade, 2000s, lost 3.48% annually.  The loss in the 2000s was hit hard in 2008 with a negative real return of 37.10%.

GIPS: Global Standard for Reporting Fund Manager Returns

The CFA (Chartered Financial Analyst) Institute created and published the Global Investment Performance Standards (GIPS) for investment management firmsin the September/October 1987 issue of the Financial Analysts Journal.  They would apply to investment advisers, certain brokers, mutual funds and consultants.  The objectives of GIPS reporting are to:

• Create a minimum standard method for calculating and presenting investment returns for global comparisons
• Ensure data are fair, accurate, consistent and timely
• Promote fair competition and eliminate barriers to entry
• Aid global self-regulation
• Acknowledge caveats for GIPS:  account selection, survivorship and measurement period biases

To achieve this, firms must follow these requirements:

• Consistent data integrity
• Uniform methods of calculation
• Complete and accurate composite construction
• Disclosure of any non-compliant history
• Reporting of long term performance is required

Additional information:

• Returns are calculated on a firm-wide basis.  They must be for at least five years and build up to ten years.  Obviously, if a firm is not five years old, then data from the inception needs to be reported.
• Performance must be presented with composite returns that have common objectives or strategies
• Managers should inform investors of any benchmark indices used for performance comparisons

Please note that compliance is purely voluntary.  GIPS promotes transparency, international comparability and best practices.  Full details may be found at http://www.gipsstandards.org/.