The Case for More Dynamic Equity Exposure

Has "buy and hold" had its day?

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Sea-LedgeWhenever bad news about insufficient liquidity ratios at pension funds and the like starts pouring in, the frenzied search for the culprits is never far behind. The high technical interest rate, negative market performance, unreliable hedge fund constructs and unfavourable member demographics are often cited as causes of the calamity. This is compounded by the fact that each pension scheme has a different point of departure. Institutions experiencing strong growth, for example, are in a much better position to make up for temporary shortfalls than those with a large contingent of beneficiaries.

However, none of this can hide the fact that for the second time in ten years the global equity market has slumped by over 40% (top to bottom) and has wrought havoc among pension funds’ mixed portfolios. The underlying cause of this situation, which has assumed catastrophic proportions in some cases, is neither the bedevilled hedge funds (despite the fact that their returns of –15% to –20% p.a. have fallen well short of their promised «absolute returns»), nor highly volatile commodities, since  both were only implemented to a marginal extent (<10%) in the portfolios. The real loss-maker,  in most cases, is the portfolios’ 30–40% equity exposure. On close scrutiny, these investments turn out to be essentially unsuitable for investors that are required to report their liquidity ratio annually. There has been virtually no public debate about this issue to date, due in part to the fact that the asset management industry has so far put forward few convincing concepts for limiting the risk of share price drops. In view of the academic debate on «regime shifts», the time is ripe to address this matter and move away from the traditional belief that «equity lows simply have to be accepted and endured».

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