Zvi Bodie tells CFO.com, “no risk” is right for pension investing
Companies are not competent to take risks with pension funds, Bodie argues
In the CFO.com article “Pension Investing: What’s the Right Level of Risk?,” journalist David McCann describes a split in the field of pension investing strategy, writing “Most plan sponsors should put more emphasis on liability hedging, one adviser claims. Another point of view: Take no risks, period.”
A proponent of the latter view is world-renowned investment expert Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University. McCann reports:
Pension funds using liability-driven investment [LDI] strategies in 2008 strongly outperformed those using a traditional asset-allocation approach, according to Watson Wyatt.
The pension consulting firm constructed hypothetical LDI and traditional investment portfolios at the end of 2007 and tracked their performances throughout last year. The LDI strategy, designed to better match investments with liabilities by investing more in long-term bonds, earned a 0.2 percent return. The traditional strategy, focused on a broad range of corporate stocks and bonds, suffered a 24.6 percent loss…
Definitions of LDI vary markedly among pension experts, however, and Watson Wyatt’s is quite broad indeed. The only definition that makes sense to Zvi Bodie, a Boston University finance professor and a former consultant to the Pension Benefit Guaranty Corporation, is putting all funds in fixed-income investments. “The pension liability you’re trying to hedge is 100 percent fixed income, so I don’t see why any risk is merited,” Bodie told CFO.com.
That opinion is based on Bodie’s contention that companies are not competent to take risks with their pension funds. “The risks you should take are in your business, where you presumably should know how to manage those risks and add value,” he said.
And it follows, he added, that placing trust in pension consultants is not a very sound strategy either, because managing their own risk inevitably entails recommending moderate funding strategies that are not the best way to meet their clients’ liability-hedging needs.
“As a practical matter, if an adviser did tell you to be 100 percent fixed income and the stock market went up, they’re [out on a limb] because they went against the current,” Bodie said.