Canadian Investment Review

Pension Funds Look to Leverage

Written by Caroline Cakebread on Thursday, March 11th, 2010 at 12:14 pm

875412_balanceThe Wall Street Journal recently reported that public pension funds in the U.S. are reducing their exposure to equities in favour of strategies that leverage their safest assets – government and high-grade bonds. The State of Wisconsin Investment Board which manages US$78 billion became the first in the U.S. to adopt this type of strategy. It is now set to borrow the equivalent of 4% of its assets. Low interest rates and volatility in equity markets have made it very difficult for pension funds to meet their liabilities – leveraged strategies aim to protect pension assets from the equity market volatility which burned so many back in 2001-2002 and in 2008. However, critics have suggested that pension funds which leverage their assets in this way are opening themselves up to looming inflation and interest rate risk.

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