Lessons from Tebow
By: Jeffrey Swanson, Southeastern Advisory Services, Inc.
January 16, 2012
Tebow… Need I say more? The name alone stokes intense passions and polarizing opinions from experts to casual fans alike. USA Today recently dubbed him a “cultural tsunami” and Republican presidential hopefuls evoke his name almost as much as Ronald Reagan. During this NFL season and playoffs, his devout supporters developed performance expectations that bordered on the divine while his detractors were predicting a football apocalypse. Unfortunately for these fans, his uneven performances created a cycle of jubilation, depression, elation… repeat. For those of us in the pension and investment community, Tebow-mania highlights a valuable lesson: when expectations become stretched, you can usually land a ticket on to the emotional roller coaster.
The Post-2008 investment environment has not been unlike the performance of Tebow in the NFL, choppy and uneven but with a positive trajectory. Now with the great recession already three years in the rear view, what’s around the corner? The hard reality is that many of the developed economies around the world now face austerity and deleveraging which increases the possibility that growth rates could be muted for a decade or more. Like Tebow throwing an interception, bad news for stocks!
That backdrop also does not bode well for public retirement funds that require a relatively consistent return stream in the 8% range for smooth sailing. While the 8% benchmark may be an appropriate long-term goal for public plans, it could continue to prove difficult to achieve in the near or intermediate-term.
Appropriately, public funds across the country are now coming to the table and adjusting their performance expectations. In fact during 2011, the $47 billion Virginia Retirement System, the $7 billion San Diego County Employees’ Retirement Association, and the $25 billion Pennsylvania State Employees’ Retirement System all lowered their return assumptions.
With such robust return requirements, most public pension trustees find themselves in the same boat; there must be a significant commitment to public equity to have a fair chance at meeting return goals. This opens the door to larger performance swings and possible funding gaps. If the future holds more uncertainty, those boards that evaluate and address their expectations today may have less funding stresses tomorrow. Let’s face it we all want a Tebow on the investment field… but its best to have realistic expectations.
In football terms, the past few years of investment returns have created what could be viewed as a “third & long” situation. Some public funds are now combing the playbook to uncover a trick play or seldom considered option to dig out of the hole. Here in Georgia the rules of the game, aka the Georgia Public Retirement Systems Investment Authority Law O.C.G.A 47-20-80, offer not only guidance but a legal framework that all boards must carefully consider… especially, in these difficult times. But similar to the talk radio sports pundits, the pension experts also disagree on what is considered the best approach or even a permissible investment.
Differing opinions on the investment restrictions by the legal community has caused the investment policies of Georgia public pension funds to reflect different approaches. All of Georgia’s public fund pension boards endeavor to stay within the spirit of the law, but there is legitimate disagreement about the letter of the law. All agree, however, that the Georgia code is a prescription for a very conservative investment approach.
Fortunately, the Georgia investment restrictions and the conservative approach was the best and most profitable course in 2011. Most funds in Georgia do not consider foreign equities or foreign equity funds to be permissible investments. The all-U.S. portfolio was a clear winner in 2011, with domestic stocks within the S&P 500 realizing a 2% gain. Conversely, foreign markets were punished with developed market stocks in the EAFE index posting a loss of 12%. Emerging market stocks within the MSCI EM Index saw losses over 20%. The Georgia guidelines also call for a conservative equity posture in the 55% range, leaving a healthy percentage in fixed income assets. Bonds turned out to be one of the best performing asset classes for the year with the Barclays Aggregate Bond Index advancing by 7.8%.
Georgia public funds should have realistic return expectations and conservative investment policies. With both, the game can be won without Hail Mary passes. And… just like Tebow, its good to have some faith!
Mr. Swanson is a senior investment consultant with Southeastern Advisory Services and has served Georgia public fund clients for nearly two decades. He lives in Jacksonville Beach, FL with his girlfriend, Molly and their Australian shepherd, Jasper.