Friday, August 26, 2011

A Random Walk in Pension Accounting

PBT Today: Pittsburgh Pension Loses Out on Millions

Personally I am going to send each member of the pension board a copy of a book just about everyone who invests in the market should have anyway.  The inimitable Burton Malkiel's classic:


Beyond that... there is a companion story with that: Lamb seeks answers to pension plan delay. Something does not add up to me.  If you were to dig into it, it sure sounded to me like the pension assets were not exactly converted to cash.. which is implied in the 'delay' in reinvesting into a more normal portfolio.. It sure sounded like the intention was to buy some form of option which would have effectively created the same synthetic investment return as cash for precisely the 3 months in the fall the pension board was worried about.   If they had done that, then once the option ran out, the portfolio would have immediately revert to having the investment returns it should.  This option strategy should also give some advantages in not incurring the costs of moving several hundred $million out and then back into the market.  Apparently that isn't what happened which raises its own questions. 

The net result however it happened could really be pretty sad.   Pension fund cashes out in fall 2010 which turns out to be quite a big run up in the market.  Delays getting back into the market in first quarter of 2011 which continued to be a great quarter for the market.  Assuming they finally got cash reinvested by April, it was just in time for the horrific returns from the market since then.  There you go. 

2 Comments:

Blogger Bram Reichbaum said...

Sadly, this book will only be read by one public official, and then it will be burned.

Friday, August 26, 2011 8:27:00 PM  
Blogger Bram Reichbaum said...

"It sure sounded like the intention was to buy some form of option which effectivly created the same synthetic investment return as cash for precisely the 3 months in the fall the pension board was worried about."

Someone has to ask -- would this "option" have paid off in the eventuality of a parking lease? I mean, there were other factors at play in the investors' and advisors' heads (the stock market was bad and scaring us while we were considering it -- was there a notable crash?) yet a synergy with a prospective lease transaction is another theory.

Friday, August 26, 2011 8:36:00 PM  

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