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Pension Fund Investment Management: A Handbook for Sponsors and Their Advisors.

As the assets of public pension plans have grown, they have increasingly attracted attention from politicians, regulatory agencies, investment professionals, the media and beneficiaries. The editors of this book observe that the days when the investment responsibilities could be given to a local banker have gone. Effective modern pension plan management requires sophisticated techniques founded on a solid theoretical basis.

This book is a collection of essays on trends and theories of investment management for pension plans. Administrators of public and private pension plans of all sizes will discover valuable insights. Even the articles nominally addressed to private plan concerns provide useful ideas and theories for public plan administrators. The editors Frank J. Fabozzi and Nick Mencher are widely published authors on investment, financial and pension fund issues. The contributing authors are primarily consultants in the investment field; however, three of the articles are written by plan sponsors. The collection is quite readable - only two of the essays are primarily mathematical in focus, but they do not require fluency in advanced mathematics. While primarily theoretical the writers are operating in the real world and offer practical suggestions for implementing the theories they propose.

Each of the essays discusses an aspect of investment management. These can be grouped into four main topics: investment risk, asset allocation, administration, and investment manager selection and evaluation. Obviously, these topics are interrelated, and a discussion of one necessarily involves the others. A common thread through all essays is the importance of understanding, measuring and managing risk.

In the essay "Managing the Asset Mix: Decisions and Consequences," Robet D. Arnott identifies four types of risk: portfolio volatility, volatility of the surplus (actuarial liabilities minus assets), long-term business risk and maverick risk. The latter is defined as the tolerance of the customer for deviation from the strategies and policies of other institutional investors. Any pension fund officer who has been a pioneer in some area will understand the importance of that risk factor. Arnott points out that a basic rule is not to exceed the customers' risk tolerance. Interestingly, he defines the customers not as the pension beneficiaries, but as the individuals who determine whether the investment officer keeps his or her job.

The essay, "How Sponsors Can Use Normal Portfolios," by Arjun Divecha and Richard C. Grinold, identifies another form of risk: misfit risk. This is the risk of the style or type of investment in which the pension plan does not invest. In other words, it is the difference between the plan sponsor's target and the aggregate managed portfolio.

Although not so labelled, another type of risk identified is "accounting statement risk." Two of the essays discuss the detrimental impact of Financial Accounting Standards Board (FASB) Statement No. 87 on investment asset allocation decisions. Both authors point out that the choice of accounting measures can have an impact on the investment strategies of plan sponsors and feel that the impact of FASB No. 87 is detrimental because it encourages the use of long bonds. Public fund investment officers may feel they can safely ignore these two essays. But as the Governmental Accounting Standards Board contemplates employer reporting for pensions, the ideas discussed here are important for public plans and employers who contribute to them.

Several of the essays discuss the use of benchmark or normal portfolios in investment management. For investment or finance officers unfamiliar with this concept, the book provides an overview of the construction, maintenance, uses and limitations of such portfolios. The authors stress that these portfolios have benefits beyond measuring investment manager performance. They also can be used to aid in asset allocation decisions and provide a means for improving adminstrators' knowledge of a manager's investment strategies.

The closing essay discusses the narrowing differences between private plans and public plans. Public plan investment officers will be gratified to read the tribute to their professionalism and dedication contained here.

This book is not a textbook, but a series of essays to provoke thought on the forces affecting pension investment management. It offers valuable insights to investment officers whether they are novices or veterans.

Available for $65 from Probus Publishing Company, 118 N. Clinton Street, Chicago, IL 60606 (800/426-1520).
COPYRIGHT 1992 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Lockwood, Deanna L.
Publication:Government Finance Review
Article Type:Book Review
Date:Apr 1, 1992
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