UAW Fund Faces Bankruptcy: Headline from 2015 Wall Street Journal

This article appeared in this morning's Wall Street Journal concerning the UAW's Fund.

(Unfortunately you have to subscribe to the on-line version of the Journal to be able to read the whole piece, but there was one paragraph that caught my eye.)

First, some background: in January of this year, as part of their settlement with General Motors, Ford and Chrysler, the UAW assumed the responsibility for paying for the health care benefits for 800,000 retired members and their spouses. The fund - named voluntary employee beneficiary association, or VEBA - is huge, totalling some $45 billion.

Here's the part that interested me (quoting):

Earlier this year, consultant Ennis Knupp & Associates, Inc. conducted a study of the benefit obligations to the UAW retirees. The trust then adopted a plan to put half of its funds in global stocks, 25% in core fixed income and 12.5% each into Treasury Inflation-Protected Securities (TIPS) and long-duration fixed income.

In other words, according to the folks at Ennis (who I have worked with in the past, by the way), the best way for a large pool of assets whose liabilities will stretch for years is to put half of the fund in securities with a blended yield around 3%, and the remainder in stocks outside of the United States.

This to me is a recipe for disaster.

First, it seems that Ennis cannot make it mind: is it worried about inflation (the allocation of 12.5% to TIPS, whose yields are around 1.5%) or deflation (12.5% to long-duration bonds, which will only help if interest rates stay steady or move lower)?

Second, why global stocks? U.S. large cap stocks currently are among the most attractive in the world both on a valuation basis as well as offering reasonable dividend yields.

Third, whatever happened to buy America? Is Ennis so bearish on the future of this country that the only opportunities they see are overseas? Mind you, I am a big fan of international diversification, but it used to be that the UAW was one of the most strident proponents of staying invested in the U.S. Do their members really want to invest in companies that have taken jobs from their members?

And, finally, why would a fund that has a longer term time horizon (as VEBA should) have only half in stocks? True, the last 10 years have not been kind to the stock investor, but history suggests that the next decade should have better returns than most other asset classes.

Attention American taxpayer: Bailout Ahead.





UAW Fund Holds Promise for Money Managers - WSJ.com