4 ms·

Junk bonds are hardly the only form of investment, and certainly not the safest, if your goal is to ensure someone's retirement. Moreover, corporate debt is at

by _qulr 6y ago

Junk bonds are hardly the only form of investment, and certainly not the safest, if your goal is to ensure someone's retirement. Moreover, corporate debt is at high risk of mass default in a market downturn such as the current one.

_qulr 6y ago
Pension funds spend $trillions on investments. They have a lot of power to incentivize corporate behavior, in either a responsible or irresponsible direction. It seems to me that pension funds have been enablers of irresponsible corporate debt stockpiling. Pension funds had a choice, and I'm not sure they chose wisely.
- em500 6y ago
  Not sure what you're suggesting here concretely, or how you imagine pension funds actually work. Asset managers at pension funds need to make some target returns on their part of the portfolio (say 5% on high-yield corporate bonds). They're just mundane desk jobs, buying and selling contracts on computer screens. We're not talking about people playing golf with the CFO of Boeing or anything like that. What kind of incentivizing responsible behavior would you imagine them doing? Yields on all debts have been structurally declining for more than three decades now. So all asset managers find themself forced to buy riskier and riskier debt at higher and higher prices (= lower and lower interest rates). If they don't, they need to tell their clients to expect lower returns / save a lot more for retirement, risking the clients taking their money to other asset managers promising higher returns.
  - _qulr 6y ago
    > Asset managers at pension funds need to make some target returns on their part of the portfolio (say 5% on high-yield corporate bonds). They're just mundane desk jobs, buying and selling contracts on computer screens. This may be precisely the problem. Pension funds have an oversized influence on our whole economy. They deserve much more care and scrutiny than this. > risking the clients taking their money to other asset managers promising higher returns. Not sure I agree with this. Pensions aren't operating in a competitive market, they're typically associated with a particular employer, acting on behalf of the employees.
    - em500 6y ago
      > This may be precisely the problem. Pension funds have an oversized influence on our whole economy. They deserve much more care and scrutiny than this. I completely agree on the abstract level, but I have no clue how to get anything actionable out of that. > Pensions aren't operating in a competitive market, they're typically associated with a particular employer, acting on behalf of the employees. The funds as institutions probably aren't, but the specific asset managers tasked with the implementation, either directly employed or contracted by the funds, certainly are operating in competitive markets.
em500 6y ago
Any large pension fund has a large portfolio of bonds of all grades and yields. Most will still have the bulk allocated to investment grade government and corporate bonds. But the yields on safe investments have been so low for so long that they all see themselves forced to choose between riskier investments (leading to cheaper and cheaper debt as per article) or telling their participants that they need to save way more for their retirements.
- _qulr 6y ago
  That is true. But I'd say it's better for the funds to be honest with the participants than to try to pretend everything is fine and paper over lower returns with higher risk, because ultimately it won't be fine. Over-leveraging is a strategy that can bring short term results but is destined to fail in the long term — catastrophically.
  - em500 6y ago
    Good luck telling your state workers that they all need to take a pay cut (which is what lower pension returns really are) and/or your local citizens that they'll face a tax hike (if you don't want the state workers to take the hit), because you read in the FT that "companies are addicted to debt", and that we have this hunch that all this debt will collapse at some unknown time in the future.
    - _qulr 6y ago
      "because you read in the FT" is a not a fair response. The linked article is not breaking news, it's an analysis of a well known phenomenon. With great power comes great responsibility. If someone can't be honest, they have no place managing other people's money.
  - smabie 6y ago
    Pension funds can maintain lower risk and boost their returns through pure alpha hedge funds, alternatives like real estate, pe, and vc, or through net long hedge funds. Simply investing in low risk bonds and equities actually is more risky than one might think, especially since the historically negative correlation between the two has been breaking down recently. But regardless, pension funds have obligations and should take on the necessary amount of risk so that they can pay out what is owed.

by _qulr 6y ago

_qulr 6y ago

Pension funds spend $trillions on investments. They have a lot of power to incentivize corporate behavior, in either a responsible or irresponsible direction. It seems to me that pension funds have been enablers of irresponsible corporate debt stockpiling. Pension funds had a choice, and I'm not sure they chose wisely.

em500 6y ago
Not sure what you're suggesting here concretely, or how you imagine pension funds actually work. Asset managers at pension funds need to make some target returns on their part of the portfolio (say 5% on high-yield corporate bonds). They're just mundane desk jobs, buying and selling contracts on computer screens. We're not talking about people playing golf with the CFO of Boeing or anything like that. What kind of incentivizing responsible behavior would you imagine them doing? Yields on all debts have been structurally declining for more than three decades now. So all asset managers find themself forced to buy riskier and riskier debt at higher and higher prices (= lower and lower interest rates). If they don't, they need to tell their clients to expect lower returns / save a lot more for retirement, risking the clients taking their money to other asset managers promising higher returns.
- _qulr 6y ago
  > Asset managers at pension funds need to make some target returns on their part of the portfolio (say 5% on high-yield corporate bonds). They're just mundane desk jobs, buying and selling contracts on computer screens. This may be precisely the problem. Pension funds have an oversized influence on our whole economy. They deserve much more care and scrutiny than this. > risking the clients taking their money to other asset managers promising higher returns. Not sure I agree with this. Pensions aren't operating in a competitive market, they're typically associated with a particular employer, acting on behalf of the employees.
  - em500 6y ago
    > This may be precisely the problem. Pension funds have an oversized influence on our whole economy. They deserve much more care and scrutiny than this. I completely agree on the abstract level, but I have no clue how to get anything actionable out of that. > Pensions aren't operating in a competitive market, they're typically associated with a particular employer, acting on behalf of the employees. The funds as institutions probably aren't, but the specific asset managers tasked with the implementation, either directly employed or contracted by the funds, certainly are operating in competitive markets.

em500 6y ago

Any large pension fund has a large portfolio of bonds of all grades and yields. Most will still have the bulk allocated to investment grade government and corporate bonds. But the yields on safe investments have been so low for so long that they all see themselves forced to choose between riskier investments (leading to cheaper and cheaper debt as per article) or telling their participants that they need to save way more for their retirements.

_qulr 6y ago
That is true. But I'd say it's better for the funds to be honest with the participants than to try to pretend everything is fine and paper over lower returns with higher risk, because ultimately it won't be fine. Over-leveraging is a strategy that can bring short term results but is destined to fail in the long term — catastrophically.
- em500 6y ago
  Good luck telling your state workers that they all need to take a pay cut (which is what lower pension returns really are) and/or your local citizens that they'll face a tax hike (if you don't want the state workers to take the hit), because you read in the FT that "companies are addicted to debt", and that we have this hunch that all this debt will collapse at some unknown time in the future.
  - _qulr 6y ago
    "because you read in the FT" is a not a fair response. The linked article is not breaking news, it's an analysis of a well known phenomenon. With great power comes great responsibility. If someone can't be honest, they have no place managing other people's money.
- smabie 6y ago
  Pension funds can maintain lower risk and boost their returns through pure alpha hedge funds, alternatives like real estate, pe, and vc, or through net long hedge funds. Simply investing in low risk bonds and equities actually is more risky than one might think, especially since the historically negative correlation between the two has been breaking down recently. But regardless, pension funds have obligations and should take on the necessary amount of risk so that they can pay out what is owed.