Unfortunately, it seems Modern Portfolio Theory didn't work too well this year. Comment from CALPers
Comment from Gary Shilling (hope he doesn't mind)
further
Locally, MyCo's pension (glad to still have it) tanked this year. The costs of refunding the loss is being pushed down to the local groups, taken directly out of the division profits.
Comments? Do you think the hedgies will wash out enough to decrease asset correlations, or is this a more permanent condition? Given the ease of pushing money around the world now (even by ordinary investors with web browsers), I'm not sure the easy days of MPT are coming back.
"In theory, asset allocation models are meant to mitigate risk through diversification. If one bucket, say equities, falls, then the fixed-income or private equity investments should offset the decline. But when markets fall more or less in tandem, the model not only fails but also puts other assets at risk of the capital needs of others. So much for theory."
Comment from Gary Shilling (hope he doesn't mind)
But as we’ve noted continually in Insights for more than 10 years, there are tremendous amounts of hot money flowing around the world. And whether it’s managed on the basis of fundamental factors, momentum, technical analysis, etc., it all tends to end up on the same side of the same trade at the same time.
further
So when stocks get clobbered, as they have since October 2007 (Chart 14), and force out hot money, it will also retreat from otherwise unrelated long positions in, say, grains, to conserve capital. Many institutional investors believe in the Modern Portfolio Theory of diversification, but erroneously thought that alternative investments would have zero or better still, negative correlation with their basic equity holdings (Chart 15). They also became convinced that commodities and foreign currencies were asset classes like equities and bonds, and merited 5%, 10% or 15% of their portfolios. They’re learning the hard way that all those correlations have proved to be close to 100% and that commodities and currencies aren’t asset classes but speculations. benefit pension plans at the end of 2007 was $60 billion. It’s now estimated at over a $300 billion deficit, which will require substantial company contributions and hits to earnings and book values next year. The 100 largest pension funds lost $120 billion in October, and probably at least as much more company contributions. Colleges and universities that have “pre- spent” their investment returns are especially devastated by 30% or 40% portfolio declines even though most average their asset values over several years in determining their withdrawals.
Locally, MyCo's pension (glad to still have it) tanked this year. The costs of refunding the loss is being pushed down to the local groups, taken directly out of the division profits.
Comments? Do you think the hedgies will wash out enough to decrease asset correlations, or is this a more permanent condition? Given the ease of pushing money around the world now (even by ordinary investors with web browsers), I'm not sure the easy days of MPT are coming back.