A Week Of Sand And Dollars

Just when you thought that you had seen everything… Governors and State lawmakers who still believe they can earn 7-8% for the next 30 years, and have little understanding of basic pension fund accounting, are going to attempt to time the financial markets with their constituents’ retirement dollars.

Facing a shortfall of more than $50 billion in his state’s pensions, and with no simple solution at hand, Gov. Tom Wolf of Pennsylvania is proposing to issue $3 billion in bonds, despite the role that such bonds have already played in the fiscal woes of other places. And he is not alone. Several states and municipalities are considering similar action as they struggle with ballooning pension costs…

The deals are generally pitched to state and local officials as an arbitrage play: The government will issue the bonds; the pension system will invest the proceeds; and the investments will earn more, on average, than the interest rate on the bonds. The projected spread between the two rates makes it look as if the government has refinanced its pension shortfall at a lower interest rate, saving vast sums of money. But that’s just on paper. In reality, the investment-return assumption is just that — an assumption, and a deceptive one at that because it does not take risk into account

Meanwhile, future pension fund investment returns are going to be much more difficult to achieve if Goldman is correct about US Equities…

If David Kostin’s calculations are right, the fizz is out of the stock market’s Champagne. Mr. Kostin, Goldman Sachs Group’s chief US stock strategist, last week forecasted no price gain at all for the S&P 500 over the next 12 months, with the index’s only return coming from dividends. For the coming 10 years he projected just 5% yearly total returns, with nearly half from dividends. That means the index value would rise only about 2.7% a year for a decade. Many money managers say he is a little on the pessimistic side, but they widely agree that future US stock gains probably will be limited, simply because stocks have gotten so expensive. “We, too, think that investors should temper their enthusiasm for stock returns. They will be mid-to-high single digits and not the double digits we have all enjoyed historically,” said Lori Heinel, chief portfolio strategist at State Street Global Advisors, which oversees $2.4 trillion in Boston.

Let’s just hope these hedge fund families are all running different strategies.

The world’s largest hedge fund managers are dominating the capital invested in the asset class, according to Preqin. The data provider found the top 11% of managers controlled 92%—or $2.78 trillion—of total hedge fund assets at the end of Q1 2015. These 570 managers also each held at least $1 billion in assets, qualifying their membership of the “$1 billion club”. “The $1 billion club has continued to grow over the past 12 months, both in terms of the assets they command and their influence on the hedge fund industry,” said Amy Bensted, Preqin’s head of hedge fund products.