GSAM Survey Shows Commodities Appear Less Risky

More than half of respondents said they view investing in stocks, bonds, property, private equity and hedge funds as slightly or much riskier than before, with commodities being the slight exception.

(November 18, 2010) — Research recently released by Goldman Sachs Asset Management (GSAM) shows that commodities are looking less risky following the credit crunch.

“Commodities may provide downside protection during periods of economic or political shock, as tangible goods with pragmatic usage become more appealing,” Brad Yim, portfolio manager, asset allocation and commodities at peer Castlestone Management, told Global Pensions. “Commodities have the rare characteristic as being an investment vehicle as well as an insurance.”

According to the poll by the Economist Intelligence Unit for GSAM, about 56% of trustees and chief investment officers and 73% of consultants feel the risk of investing in commodities has not altered or is lower than it was two years ago, compared with 44% of trustees who feel the risks are slightly, or much greater now. Trustees and CIOs, on the other hand, were evenly split (37% each way) on whether or not investing in stocks, usually their largest allocation, is riskier than it used to be. “The financial crisis and the ensuing volatility in the global economy and capital markets have challenged traditional wisdom about the risks associated with investing,” the report stated. “More than ever, there is now a pressing need for investors to have a clear idea of the risks they are taking, as that can influence the amounts invested, the asset classes targeted and the specific products selected.”

Despite the increased confidence in commodities as an asset class, equities, bonds, property, private equity, and hedge funds are still perceived as riskier than they once were. As a result, many of the 289 European and UK institutional and retail investors the Economist Intelligence Unit polled said they de-risked their allocations during the crunch.

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Heightened confidence in commodities by institutional investors is reflected in the Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, aiming to increase investments in energy and minerals. According to Bloomberg, Chief Executive Officer Michael Sabia said investment in natural resources would position the fund to benefit from an unexpected commodities boom. More than half of the pension fund manager’s US-listed stock holdings are in energy and materials, Sabia told Bloomberg News in an interview. “Natural resources, energy, those are areas where we think there’s an opportunity to play offense because of what the structural trends are and what our capabilities are,” he said.

The Caisse oversees about $132 billion in assets including stakes in Quebec gas distributor Gaz Métro LP and Suncor Energy Inc., the country’s biggest oil company. An August 11 regulatory filing revealed more than half of the Caisse’s US-listed stock holdings of $11.3 billion consisted of shares in energy and materials.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

The rising cost of worker and retiree benefits has pushed nineteen states to reduce pension liabilities or increase employee contributions in the first 10 months of 2010, a new study shows.

(November 18, 2010) — A new report issued by the Pew Center on the States has shown that more states are taking action to reduce pension liabilities in the first 10 months of the year.

The brief, posted on the center’s website, showed that nineteen states made an effort to reduce their schemes’ liabilities by reducing benefits or upping employee contribution requirements. While 11 other states took similar action in 2009, eight did so in 2008.

Yet, states continue to be in a severe fiscal crunch because they’ve been promising more in retirement benefits than they’re able to pay, resulting in an alarming $452 billion total deficit for state and local governments in fiscal 2008. To deal with the large deficits, states are weighing proposals that range from switching from defined benefit to defined contribution plans to upping the retirement age. Illinois, for example, took action on improving its pension system, the worst-funded in the nation according to Pew, by raising the retirement age to 67, the highest of any state. The inaction to tackle the deficit in Illinois has reportedly boosted the state’s borrowing costs by as much as $551 million a year.

“Illinois is much like other states not keeping up with its annual payments to their fund,” Pew spokesman Stephen Fehr told aiCIO. “They’ve been increasing benefits to public employees without thinking how they are going to pay for them in the future,” he said. “It’s not just the recession that caused this problem — Illinois didn’t manage their pension bill in good times and bad, and its not a problem that will get better anytime soon,” noting that the pension deficit around the nation has led to severe underfunding in other state programs to make up for mismanagement.

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“It took years for states to get into their current pension predicament, and it will take years for reforms and fiscal discipline to get them out,” the brief indicated. Pew said winners in state legislatures and governor mansions following this month’s elections “will take office having promised to improve how their states will handle these bills coming due.”

According to Pew’s research, Arizona, California, Illinois, Maryland, Michigan, New Jersey, New Mexico, Rhode Island, South Dakota, and Utah have all reduced employee benefits this year. States that increased employee contribution requirements and reduced benefits were Colorado, Iowa, Minnesota, Mississippi Missouri, Vermont and Virginia.

In February, the Pew Center on the States issued another survey that showed that with a combined $2.35 trillion in assets for pensions, health care and non-pension retirement programs for current and retired workers, states needed $1 trillion to match their liabilities. According to Pew’s report, detailed in “The Trillion Dollar Gap,” Pew said pension deficit would have to be paid over the next 30 years by state and local governments, amounting to more that $8,800 for each household in the US.

“While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states’ inability to save for the future and manage the costs of their public sector retirement benefits,” said Susan Urahn, managing director of the Washington-based policy research organization, in a news release. “The growing bill coming due to states could have significant consequences for taxpayers — higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742