Archives for December 2016

Update: CalPERS Expected to Formally Reduce Return Forecasts

Posted on 12.22.16 |

From The Sacramento Bee (December 20, 2016)

CalPERS moved to slash its official investment forecast Tuesday, a dramatic step that will translate into billions of dollars in higher annual pension contributions from the state, local governments and school districts.

CalPERS’ Finance and Administration Committee voted 6-1 to lower the forecast from 7.5 percent to 7 percent in phases over three years, starting next July. Although the committee’s vote must be ratified by the entire board Wednesday, most other board members indicated they support the move as well.

It would be the first adjustment to the forecast in four years.

The move is a recognition that investment returns are falling and that the California Public Employees’ Retirement System, which is just 68 percent funded, needs higher contributions from government agencies to solve its long-term problems.

“We’re in a low-growth (investment) environment, and it’s expected to remain that way the next five to 10 years,” board member Henry Jones said.

Real Implications of Reduced Pension Fund Returns

Posted on 12.19.16 |

Last week, the investment staff of CalPERS — the $300 billion California pension fund — announced that they want to reduce its target of 7.5 percent annual returns. According to Chief Investment Officer Ted Eliopoulos, achieving a 7.5 percent annual return is no longer realistic. Holy cow!

The implications of this proposal, if adopted, are significant and “would trigger more pain for cash-strapped cities across California and set an increasingly cautious tone for those who manage retirement assets around the country.”

Can you imagine how many people are going to be affected? Here’s the bottom line. The pension system, across our great nation, is underfunded and in trouble.

Debt — Here, There and Everywhere

Posted on 12.05.16 |

As consumers and investors, we’re currently confronted by a serious problem: debt. Naturally, because of the global economy, the issue is not confined to the United States.

Of course, debt in and of itself is not a bad thing. For example, for a new business, debt can be the fuel for capital investment and expansion. Prudent capital investment can lead to revenue growth and the capacity to repay debt. While interest rates are low, it’s feasible to manage and reduce debt.

It gets challenging when rates begin to rise. Servicing high levels of debt (as we have today) in a rising rate environment will result in sustained, muted economic expansion (i.e., GDP growth). Further, we need to monitor inflation, particularly when rates begin to rise.

Monthly Valuation Review

Posted on 12.05.16 |

At the beginning of every month, we look at various market valuation metrics to consider forward returns and assess risk levels.

Bottom line: the market sits at a point more expensive than it was before the great dislocation in 2008. It sits just off of the second highest level in history. Risk remains high.

After the recent “Trump rally,” valuations are even higher. Median P/E has risen from 21.9 to 22.8 as of November 30, 2016. Thus, no change in what this tells us about the probability for low forward 10-year returns.