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Old 08-06-2013, 10:23 AM   #21
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Originally Posted by NW-Bound View Post
I knew that my data will cause a dissonance.

I did not look up performance of Wellesley or Wellington, or Dodge & Cox Balanced which is another good fund that I have. If you said that these return better than the 5.6% that the 100 largest pensions obtained, yes, that could be very well true. What does that prove? It proves that the above 3 funds, active funds mind you, not indexed, have been good funds, and I hope that their performance will continue (I have some money in all 3).

Why don't pension funds all buy into these 3 funds? ...
Maybe I'm not being clear.

Sure, some funds will beat indexes, that is expected. But would the average of the 100 largest active mutual funds beat the indexes by a significant margin? IIRC, studies say no. That is why I question those numbers.

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Old 08-06-2013, 10:37 AM   #22
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Maybe I'm not being clear.

Sure, some funds will beat indexes, that is expected. But would the average of the 100 largest active mutual funds beat the indexes by a significant margin? IIRC, studies say no. That is why I question those numbers.
Yes, that does seem high. But that's what they quoted out of a survey.

From what I know, MFs that are opened to retail investors have a very tough time to beat the market. Why?

Retail investors flock to a hot MF when it's high. That causes the MF manager to buy high. They redeem when the market is low. That causes the manager to sell low. The MF manager has no choice!

Institutional investors who have control of the fund inflow/outflow can often do a lot better. Same as small investors like us who can stomach the variations, and perhaps can make some fortuitous rebalancing (yeah, that's dirty market timing that's frowned on again).

Some retail active funds have done well, I think mostly because their clients are loyal and do not flock to redeem when the market is bad. That allows the manager to make better investment decisions than constantly selling to meet redemption.

To verify my theory, I would need to compare fund size changes (total assets under management) of Wellesley et al to other funds that cratered. I suspect that the funds that did terribly met their demise because of their shareholders who panicked and fled. Selling begets more selling.

PS. I just now noted that you said "active MFs". No, the article talked about 100 pension funds, which are not the same thing. Pension funds are institutional investors, and they do not all invest in MFs like retail investors.
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Old 08-06-2013, 10:48 AM   #23
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Yes, that does seem high. But that's what they quoted out of a survey.

From what I know, MFs that are opened to retail investors have a very tough time to beat the market. Why?

Retail investors flock to the market when it's high. That causes the MF manager to buy high. They redeem when the market is low. That causes the managers to sell low. These MF manages have no choice! ...
OK, that could well be. But aren't index funds subject to this also? Yet, they run very close to their index. OK, maybe people move in/out of index funds less than the more active funds, but it must still be happening.

I would think that the Retirement Target funds would be the 'purest' of Buy & Holds. I know their fees are very low (a reflection of limited trading?), but I have not tried to compare to an index - that might not be too hard, IIRC they don't change their AA every year, but maintain an AA for maybe a decade or more at some stages. And they can probably adjust their AA with new deposits, rather than having to sell/exchange.

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Old 08-06-2013, 11:20 AM   #24
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Index funds are, well, indexed. So, if people bailed out of VFINX (Vanguard S&P index), that added to the decline of the S&P500, and VFINX still matched its index by definition (minus the transaction costs and other frictions of course).

Good active funds like Wellesley/Wellington/Dodge & Cox are leery of fund bloat. People flock to them when they are doing well, and they will not be able to invest that new money well. Keep bidding up on the stocks that they already have? And causing the same explosion that ballooned up the dotcoms of 2000? And these newcomers will be the first to redeem, causing them to sell low.

Talk about the tough challenges faced by MF managers, I have told of a musing written by the manager of a relatively small MF of only about $1B in assets. He spotted a small company that had great prospects. In order to make it worthwhile, he had to accumulate several tens of $MM. But that was a relatively high volume for this small stock, and whenever he tried to buy, the sellers moved up their ask price. So, it took him a couple of months of nibbling to get the amount of shares he wanted, while the price was inching up. As for small guys like me who only wants a few hundred shares, one click then I am done. Big MFs of course have to pass over these deals, because even if they own the entire small company, that still does not make a dent in their bottom line. And when they want to sell, whom do they sell to?

Not to make excuses for MF managers, but just telling the other side of the story. What have I got from this? I have decided to be a slicer-and-dicer, and invest mostly in individual stocks or sectored ETFs, so that I can rebalance between them or buy/hold as I see it. I will be responsible for my own actions, and do not want to be negatively affected by fellow MF shareholders.

PS. Please see my postscript in the post above about the distinction between MFs and pension funds.
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Old 08-06-2013, 12:58 PM   #25
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The chart actually does a good job of reinforcing the tremendous costs of trying to play check up in prefunding a pension system instead of pay as you go.
Indeed it does. Though it also shows they are losing big money completely aside from pension funding. USPS is simply going to have to reinvent themselves in the digital age, might as well get on with it IMO...instead of throwing out red herrings like the pension issue as if that was the solution.
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Old 08-06-2013, 01:04 PM   #26
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.....I did not look up performance of Wellesley or Wellington, or Dodge & Cox Balanced which is another good fund that I have. If you said that these return better than the 5.6% that the 100 largest pensions obtained, yes, that could be very well true. What does that prove? .....
Well it proves to me that any claim that part of the reasons why pension funds are in trouble is due to "investment losses inflicted by the 2008 market collapse" is a red-herring because the "market" has fully recovered and then some. The same line of thought would apply where the press or people who claim that individuals can't retire because of the great recession - it may be true but it was because they didn't stay the course and probably bailed on stocks and never got back in to see the recovery. I know many people in this situation.

I suspect that the 5.6% might be about right depending on the average AA of pension funds which may be less equity focused than Wellesley.

Also, I seem to have vague recollection that some pension funds were branching out into private equity and some more exotic investments and I suspect that the didn't understand the additional risks they were taking and got caught by the short hairs.
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Old 08-06-2013, 01:30 PM   #27
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But, but, but you did not think of the 6% WR!

Yes, no doubt some pension funds might have taken additional risks, and got hurt even worse. But let's take the average return of stocks and bonds, and use that as the rule.

As I said repeatedly, FIRECalc and the other historical simulation show that an indexed portfolio got decimated in the last 10 to 13 years, with a WR of 6% or higher. And that's for the entire spectrum of indexed portfolios, from 100% stock to 100% bond.

Have you made a run and see for yourself? Be sure to use 6% or 7% WR.

Wellington, Wellesley, and Dodge & Cox are active funds! God forbid, but they picked stocks!

They did better than the average, which means there are others that are worse than average. And the average already sucked in the recent years.

PS. Please see my post on another thread regarding Wellington: http://www.early-retirement.org/foru...ml#post1345708
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Old 08-06-2013, 02:06 PM   #28
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Let me frame the issue the other way. Do you think that the 2008 market collapse is a significant cause for the current underfunding of pension plans today?

BTW, the 6% WR is likely predicated on returns over a much longer time frame than the last 10 years.

You also indicate that "an indexed portfolio got decimated in the last 10 to 13 years". At least for the 10 years that is not the case as indexed equities (using Total Stock as a proxy) returned 8.4% and bonds (using Total Bond as a proxy) returned 4.9%. If that is decimated then bring it on as the 7% return for a 60/40 retirement portfolio is 1.5% better than the conservative 5.5% I use for my retirement planning.
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Old 08-06-2013, 02:36 PM   #29
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Since we are both citing actual returns, let's examine and compare them.

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At the depth of the recession the $10,000 invested on 8/1/03 had declined to $8,591 and $11,459 for Total Stock and Wellington, respectively, but the most current values are $22,363 and $23,198, respectively for IRRs for the 10 year period of 8.4% and 8.8%, respectively.

Wellesley had a flatter line and dipped to $11,478 in 2008 but still returned 7.4% for the 10 year period.
There, you are using the starting point as 2003, near the bottom of the market in that period. And then, you are using the end point of the current date of 8/2013, which is currently at an all-time high. Of course the result will look better.

On top of that, the numbers are before inflation. So, you need to adjust for that. Additionally, the returns are for 0%WR. Let's put a 6%+ WR that the pension managers had to pay and see how that looks. You would have drawn down your principal such that when the market recovers, you had nothing left to gain from the rise.

You wrote "BTW, the 6% WR is likely predicated on returns over a much longer time frame than the last 10 years."

Of course I agree with that. Now, the recent lousy performance has caused the fund assets to drop, exactly like the FIRECalc traces that drop and skim the bottom of the chart for bad periods.

We have been talking about if one retires in a good year and bases his 3.5%WR on that year, it's not going to be the same as retiring in a bad year and basing the 3.5% on that bad year. During the good years of 1980-2000, perhaps many pensions did build a surplus. People probably demanded a cut-back in contributions, or an increase in benefits, or both. And the market performance allowed them to plan on a higher WR. In about 2001, I read an article in Business Week saying that some pension funds projected a return of 9%. BW said that was too high and suggested 7 or 8%. Even that turned out to be too high.

Now, what do we do? Should the pension managers cross their fingers and hope for a string of good years to bring their assets up? Or do they have a choice of cutting down WR like some concurrent threads talk about going even below 3.5% WR (from the current 6%+) to regain after a string of bad years? Or bring in new contributions? The latter means going back to work for ER people, and raising taxes for state pensions.

The above quandary is what we talk about here.

PS. Also remember the additional problems that Mulligan talked about, namely retirees living longer, while the current contributors drop in numbers due to cut-back of state employees. Tough, tough problem!
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Old 08-06-2013, 02:38 PM   #30
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Politics is another reason some pensions are in trouble. Politicians put pressure on state pension managers to fund, guarantee and invest in pet projects. Here is a good example:

Michigan movie studio defaults on bond payment, state pension funds to cover costs | Michigan Radio
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Old 08-06-2013, 04:42 PM   #31
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While investment returns are certainly a factor I think there is a lot else going on that is making the pension funds look worse.

Very slow growth in both public sector employment and wages, now in the long term this is a good thing. But in the next 20-30 year this a bad thing since less workers to pay into the fund making lower salaries hurts the ability to pay current and worker near retirement.

Lower than expected number of folks quitting public sector jobs before vesting. This clearly a function of the crisis.

Systemic underpricing of everything from early retirement, to purchasing of service credits.

Lots of people gaming this system. Now I don't have any hard data on this, but this includes various pension spiking tricks, which are only now being plugged. Plus legitimate things like people taking public service jobs in their late 40 or early 50s working 10 to 15 years to get the good pension plus medical care. I have yet to see a pension plan detailed report that models this correctly.

For the badly underfunded plans like Il. or right here in Hawaii. A huge factor is the state government not contributing what they needed to.

Finally, while pb4uski is right 7% is a perfectly respectable return before the crisis the typical pension plan was estimating 8.5-9% returns. The 1.5-2.0% shortfall over ten years adds up to 15-20% shortfall.
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Old 08-06-2013, 05:09 PM   #32
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Lest other posters get me wrong, I am not saying that many (most?) pensions have not been mismanaged, or that demographic trends did not play a part, or there have not been abuses etc...

My point in all earlier posts was that my simple simulation runs show that just the poor market performance would have done them in already with a 6+% WR. Or are we saying now that FIRECalc and other historical simulations are just garbage? Shall we have WellesleyCalc or WellingtonCalc for ER planning?

My own lesson from this: Stick with 3.5% WR, or I may go down the tube. Well, I might not either, as I may not live till 80.

And then, remember that if your portfolio goes down 50% (after inflation adjustment, mind you) like bad years in the historical simulation (with just 4% WR too!), you know and accept it. But with a public pension, they will want your head! You will get nailed to the cross for being 50% underfunded.
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Old 08-06-2013, 06:25 PM   #33
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Lest other posters get me wrong, ....

And then, remember that if your portfolio goes down 50% (after inflation adjustment, mind you) like bad years in the historical simulation (with just 4% WR too!), you know and accept it. But with a public pension, they will want your head! You will get nailed to the cross for being 50% underfunded.
OK, I did sort of miss where you were going, but it is clear to me now.

And a portfolio/fund can go down ~ 1/2 even with no withdrawals! 6% versus 4% probably won't make all that much difference, but it sure won't help.

One advantage the pension funds have over the individual retiree - they truly can pool that longevity risk. Look at all the threads here asking about how long you expect to live. People like me want to plan for the best (worst?) case, and that means cutting the WR some. But the pensions just look at averages and have at it - (almost) no worries!

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Old 08-06-2013, 06:54 PM   #34
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Yes, it is true that a portfolio can go down 50% whether the WR is 4% or 6%. The difference is that one has a much better chance of recovering with 4% than with 6%. But meanwhile, it is scary for an individual and causes mass hysteria for a public pension.

And I just found out that CalPERS, a very large fund was still expecting 7.5% return! Moody said only 5.5% could be expected, looking forward. Whether these numbers are before or after inflation, I could not find out.

About longevity pooling, a pension may be able to pay an individual higher than that person can get himself. But the aggregate payout cannot be larger than the fund return, correct?

By the way, I found the following excerpt from an April 2013 article on the return of CalPERS, one of the largest pensions. Note that CalPERS lost only 1/3 at the bottom of the Great Recession, about the same or possibly less than Wellesley, Wellington et al. And if you are going to say Wellesley and Wellington have rebounded sooner, remember to compare their performance under 6%+ WR.

The California Public Employees’ Retirement System reached a market value of $260.8 billion in assets, surpassing the high set before the global financial crisis wiped out more than a third of its wealth.
...
The largest U.S. pension, with half of its money in equities, passed its pre-recession high of $260.6 billion on Oct. 31, 2007, according to a posting today on its website. The fund returned 13 percent in 2012, about the same gain as the Standard & Poor’s 500-stock index.
...
Even with its gains, the Sacramento-based pension is still short $87 billion, or about 26 percent, of meeting its long-term commitments, and has had to ask the state and struggling cities to contribute more.
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Old 08-06-2013, 07:43 PM   #35
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....And I just found out that CalPERS, a very large fund was still expecting 7.5% return! Moody said only 5.5% could be expected, looking forward. Whether these numbers are before or after inflation, I could not find out......
You're kidding, right? Those have to be nominal returns, not real returns.

Is the 6% WR you seem so focused on net of contributions, or excluding contributions? What was the source of the 6% WR?
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Old 08-06-2013, 09:07 PM   #36
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You're kidding, right? Those have to be nominal returns, not real returns.
Eh, like I said, I did not know, and I just could not be sure of anything. I saw something about a CalPERS manager saying the stock return of the last 30 years was 11% (nominal), so why he couldn't expect some reversion to that, or something like that.

People tend to mix up nominal vs. real return, so I do not want to assume anything, and I stated so. Hopefully, they meant a nominal return of 7.5% and not real.

But what is the YTD return so far in 2013? Happy days are here, oui?

Quote:
Is the 6% WR you seem so focused on net of contributions, or excluding contributions? What was the source of the 6% WR?
I mentioned reading an article in BW in 2001 saying pension funds were expecting 9% returns. And if we take that as nominal return to be safe, and assume a 3% historical inflation, then the expected real return is 6%. So, I assumed that the pensions were going to spend that. I will admit that I forgot about contributions. That would mean they could spend even more!

You want actual numbers? Man, you make me work too hard!

But I wanted to satisfy my own curiosity too. Thanks goodness, a quick search found on Wikipedia the following. See CalPERS.
The California Public Employees' Retirement System (CalPERS) is an agency in the California executive branch that "manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families". In fiscal year 2007-2008, $10.88 billion was paid in retirement benefits, and in calendar year 2009 it is estimated that over $5.7 billion will be paid in health benefits.

... the peak value of its assets of $260.6 billion in October 2007...
I do not know if administrative costs were included, but that was a payout of 6.4%. From that, we need to subtract contributions, so the outflow was certainly less than 6%. But we also need to consider that the balance in Oct 2007 was an all-time high too.

That's as far as I got. So, take a WR of 5% or whatever, then run FIRECalc over the recent years, and perhaps we'll see that it still would not look too good.
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Old 08-06-2013, 09:27 PM   #37
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As I described in another thread, the market performance in the last decade has been dismal. Here's the result from a historical simulation that I found online for 3 different portfolios over the period of 1/2000 to 1/2013. The results are annualized and corrected for inflation.

100% stock: -0.5%/yr (Note: Annualized total return, inflation-adjusted)
50/50 stock/bond: 0.97%/yr
100% bond: 1.49%/yr

It should be no wonder that so many institutional investors ran into trouble. I am sure they used much higher return numbers in their projection.

So, unless they were good stock pickers or good market timers, they were doomed. If you are average, you are dead meat. And of course, not everybody can be above average.
Well, I owned both Wellesley and Wellington during the period in question and IF Quicken is to be trusted, a combination of those two delivered a not too bad 7% rate of return annually from 1/1/2000 to 1/1/2013 (not inflation adjusted). Maybe those pension managers ought to listen to Uncle Mick?
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Old 08-06-2013, 09:32 PM   #38
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But as I pointed out, these funds are active funds. What if the entire US buys into these funds? Would that mean that 100% of people would be better than the average?

Isn't there a concurrent thread about Wellington closing to new investors? CalPERS itself is 3.5 times the size of Wellington, let alone other pension funds.
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Old 08-06-2013, 09:33 PM   #39
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You're not even close. But let's not let facts derail a good debate.

$ billions20122011
   
Benefits 16.0 14.8
Contributions 11.4 11.0
Net 4.6 3.8
   
BOY balance 241.8 201.6
WR1.9%1.9%

See http://www.calpers.ca.gov/eip-docs/a...ve-summary.pdf for details
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Old 08-06-2013, 09:44 PM   #40
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From your source, I saw the contribution of $3.6B employee + $7.8B employer = $11.4B. Checked. That's what I could not find.

However, the benefits were $15.4B retirement + $6.9B health benefits = $22.3B.

That works out to 4.5% WR. Not as bad as I thought, but more than you computed.

If it were really 1.9% WR, why would they be in trouble? Is that not we were talking about?
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