The key to the successful operation (of a pension fund over the long haul is to have a clear overall strategy, a philosophy if you will, outlining the path to follow in pursuing the goal of providing for the best possible retirement of your members.
Strategies, may range across the investment spectrum from the conservative to the venturesome. Much depends on the financial health of a given fund and the confidence a pension board has in its ability to read markets and to select fund managers.
In determining basic investment strategy, no board or fund director can ignore the basic temperament of the plan's membership. When dealing with a pension fund, as opposed to other investment plans, you can pretty, well assume that that temperament leans well to the conservative side of the spectrum.
Still, while honoring the reasonable inclination of pensioners to avoid risk, stewards of pension funds are also obliged to act in the retirees' best interest. Sometimes the two -- the retirees' disinclination to take risks and their best interests -- are at variance.
Boards, Retirees May Differ
A clear instance of the conflict can be seen when a board must take into consideration the need to keep up with inflation. A too cautious, overwhelming dependence on "super safe" investments with scant returns may well leave deserving retirees with insufficient funds to keep their homes or their dignity. This is particularly true of guaranteed-benefit plans.
We at the Massachusetts Bay Transportation Authority Retirement Fund in Boston, a guaranteed-benefit plan, have adopted a strategy meant to straddle the two imperatives of fiduciary security for the fund and the financial security of its members. The strategy can be summed up in one word, "diversity."
The board constantly examines a fairly broad array of investment possibilities. Statistically, right now, 48.4% of investment is in domestic stocks and bonds. Government bonds account for 13.7%; fixed income, 12.1%; short-term investments claim 10.6%; and real estate, 8.8%. Another 6.4% is invested in various enterprises outside the country.
Investments in each of the broad categories are likewise varied. The largest single area within our industrial portfolio is consumer staples at 17%. But there are nine other areas, the smallest of which is transportation at 3%.
Our real estate investments further demonstrate the pattern of diversity, both in kind and in geographical distribution.
Just over 25% of our real estate portfolio is in office space and nearly the same percentage is in industry, with retail holdings close behind at better than 23%.
Geographically, the Pacific Coast is the region of our greatest real estate concentration, at 22.4%; followed by the East North Central area, at 17.2%; and the Mideast states from New Jersey over to Kentucky and through the Carolinas, at 17%. The Northeast absorbs 13.8% of our current real estate investment.
Striving for Diversity
The point I'm making is that the fundamental commitment to diversity is honored throughout the entire extent of our investments.
It is our view that, while not all investment areas will prosper to the same extent at the same time, the overall health of the fund is not dependent upon the unwavering prosperity of any one segment. Indeed, we have experienced losses in some isolated areas. Recent real estate returns is an example. But diversity has allowed us to overcome -- and ride out -- any such confined losses.
On a practical, day-to-day, basis we have been able to create a situation that minimizes risks and meets actuarial assumptions.
Essential to successfully following an underlying investment strategy is choosing the right fund managers. By right fund managers, I mean, in the first place, people who are comfortable with your expectations as to style and who make a complementary fit with the rest of the investment team.
At the MBTA Retirement Fund, we have 27 different managers. As recently as 10 years ago, under a different custodian, the fund had only four.
Growth Plus Value
We carefully choose new managers to maintain a balance between "growth managers," who select stocks on the basis of their perceived growth potential, and "value managers," who tend to look for a faster return on offerings they feel are underpriced in the market.
Our overall game plan calls for those hired as growth managers to be consistent in that style and for those selected as value managers to stay within that expectation. We want them to do what they were hired to do, even in the face of short-term setbacks.
Before deciding on engaging new fund managers, we check their track records. Candidates must have a record of performing within the top one-third of their asset class.
Once fund managers become part of the team, we continue to monitor their performance on a long-term basis. To grade a manager over too short a term is not only unfair, but you run a real danger of inhibiting their efficiency. Normally, MBTA managers are given two to three years to prove their worth.
Over all, we like a constant performer. The manager who notches a steady 25% growth per year is more valuable to us than the one who does a spectacular 50% growth one year, only to follow with a 50% downturn the next.
The board feels roller coasters belong in amusements parks. More importantly, so do the members in retirement and those still working toward that day. Neither like dramatic losses, even if you can point to that great coup the year before.
A probationary period can come to an abrupt halt in cases where a fund management firm loses what we consider to be a key player from its organization. This is something to which we give immediate serious consideration. The truth of the matter is, your confidence resides in the persons you deal with face to face, not the company logo on their business cards.
Our basic philosophy and approach to fund management has stood us in good stead, even in the bad economic times. Despite market queasiness in the past few years, we passed the $1 billion mark in assets last March. That's up from $259 million in 1982.
Over the same period, we went from 63% fully funded to 100% funded, while increasing benefits to retirees.
A determined commitment to diversity, despite the passing attractions of glamorous market offerings, has paid off to the benefit and peace of mind of some 12.000 members.
