More than $1 trillion is resting in America's pension funds. Well, resting is the wrong word. Much of the money is constantly on the go -- into and out of huge blocks of stocks, bonds, shopping malls, apartment houses.
Pension money comes from corporations. It is bound for workers during their sunset years. In between, it is entrusted, mostly, to professional money managers who specialize in investing pension money and making it grow.
Even when money managers take a cut of less than 1 percent of the assets of a billion-dollar fund (such as the $22 billion General Motors fund), several million dollars a year in management fees can be at stake.
But for all their sophisticated computer models and exotic investment theories, pension fund managers again were not able to outperform the stock and bond markets in 1984.
Standard & Poor's 500 stock index did better than 70 percent of pension funds last year, according to the latest data complied by Trust Universe Comparison Service (TUCS), which monitors tax-exempt investment portfolios. In 1983, during a very bullish phase in the stock market, the S&P beat 60 percent of the pension funds. And in the years 1980, '81, and '82, the S&P outdid 50 percent of the pension funds.
``For money managers, last year was the year to have been in the S&P,'' Ralph Knisley, vice-president of Irving Trust Company, noted at a recent TUCS conference here. ``It was not a good year for the active manager.
``It may be heartening news for the amateur investor that the big guns couldn't outshoot the market,'' he said. ``But many millions of American workers have retirement benefits riding on the skills of these fund managers. Moreover, the poorer the investment performance, the more a corporation has to meet its pension obligations out of its own pocket.''
``No matter how you measure it, pension assets are of critical importance to corporations,'' says Fred Settlemeyer, TUCS chairman and vice-president of Boston Safe Deposit & Trust Company. ``[Fund assets] are as big as many of the divisions of a corproration.''
A corporation must decide how to forecast its pension liabilities and how to achieve a high total return -- ``and you either earn it or you fund it,'' Mr. Settlemeyer says. ``A corporation prefers to earn it [through investments].''
Underperforming the market gives impetus to such safe alternatives as stock index funds. For if a company just matches its pension fund investments with the S&P 500, it might well do better than by hiring an expensive management team to dream up interesting places to put the bucks. This in part accounts for the surging growth of stock index funds today, trust officers note.
There is a problem with index funds, however: If the broad market is up, the pension, tied to a stock index fund, will be up. But since the S&P is an average, some narrower segment of the market (in '84 it was utilities; in other years it might be high-tech) could do much better than the S&P. And when the broad market falls, the index-linked pension fund dips, too.
The stock market has been generally on an uptrend since the mid-1970s, so no problem yet. But if the market were to reverse, pension assets could fall -- perhaps even below the inflation rate.
Inflation is really the bottom line on fund performance. The S&P is a somewhat arbitrary yardstick, but the inflation rate is a fairly real one. The value of retirement benefits ought at least to remain constant in real (inflation-adjusted) dollars, pension fund managers and corporations agree.
For most funds this has not been a big concern. Every year since 1980, according to TUCS, a majority of pension funds have had a rate of return that exceeded the inflation rate by about 7 percent.
It's just that the S&P 500 has averaged 14.6 percent increase during the past five years, and most professional money managers haven't been able to beat that. Nor, if they manage pension funds that have a large weighting of bonds, have they beat the widely followed Shearson Lehman government/corporate bond index, which returned 12.5 percent during that period. (``Balanced portfolios'' did better last year, according to TUCS, beating the S&P but trailing the Shearson index. These funds were defensively arranged at the end of '84, with stocks accounting for 48 percent of the portfolio on average, down from 53 percent in '83.)
Says Mr. Knisley: ``In '84 there were two [stock market sectors] where there were significant underweightings by money managers -- utilities and energy. [Yet] those were the two sectors that did the best by far.''
The same is true with those money managers who invested in bonds. Mr. Knisley says pension fund managers went to shorter maturities throughout the year, so by the end of the year only 4 percent of the pension funds had long maturities. And yet interest rates fell, the bond market rallied, and long maturities did better than short ones. Table:How pension funds performed last year Managed equity portfolios (median) +1.90% Standard & Poor's 500 index +6.1% Managed fixed-income portfolios (median) +13.7% Shearson Lehman bond index +15% Source: Trust Universe Comparison Service