Yesterday I posted a note on the puzzling move by the state of New Mexico's pension investment board to reduce its stock exposure in favor of low yielding bonds and private equity.
As I mentioned, to me this move seems totally inconsistent with how a pension fund should be run. With most of its liabilities being of the "long tail" nature, pensions should invest in the areas that offer the best possibility of achieving solid longer term returns.
The history of the capital markets would suggest that common stocks - especially stocks paying attractive dividends - offer superior investment results to either bonds or cash.
True, the last 10 years have been poor ones for stocks. However, some of this reflects the incredible overvaluation of the market at the beginning of the 21st century.
For example, the price/earnings ratio of the S &P 500 at the beginning of the year 2000 was 30x, and the dividend yield was barely above 1%. Now that same price/earnings ratio on trailing 12 month earnings is under 17x - using the depressed earnings of corporate America during the past year - and the dividend yield is about 2%. Both today's P/E ratio and the dividend yield (as paltry as it is) compare favorably to historic averages.
In other words, today's valuations would argue that the odds of superior returns for stocks over the next decade are much higher than most other asset classes.
So what happens if the pension boards decide to make decisions that harm the longer term returns of the plans they are supposed to administer?
Today's article in the Wall Street Journal tells the story - you don't even need to read the whole story to get to the conclusion.
The current shortfalls in many pension plans are the result of many factors, but one of the biggest ones is poor investment decisions made by committees focused only on yesterday's results. And in the end all of us - the U.S. taxpayer - will wind up paying.
Congress Weighs Bailout of Pension Plans - WSJ.com
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