IMF: Pensions May Flock to Emerging Markets

A new report by the International Monetary Fund (IMF) reveals that pension and insurance funds may up their allocation to equities and other riskier assets in emerging and developing countries.

(September 14, 2011) — A recent report by the International Monetary Fund (IMF) notes that pension and insurance funds may up their investments in equities along with other riskier assets in emerging and developing countries.

According to the group’s Global Financial Stability Report, historically low interest rates in industrialized markets are threatening pension plans in Canada, Germany, Japan, Switzerland, Britain and the United States. Due to the low interest rate environment of those markets, pension and insurance vehicles are being left underfunded as a result of their reliance on traditionally safe investments, which are yielding little or nothing.

Consequently, the IMF reported noted opportunity in more aggressive, relatively riskier assets.

The report stated: “Investing in emerging markets is seen as potentially increasing portfolio returns without taking on excessive risk. A number of factors contribute to this view, including (i) underweighting of emerging markets in most portfolios (although exposure was already increasing before the crisis), so that emerging market assets can help diversify portfolios; (ii) low returns and increasing risk in advanced economies; (iii) a favorable view of the liquidity available in most large emerging markets; and (iv) an improvement in economic outcomes and a decline in policy risk in emerging markets.”

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In addition, the report concluded that new regulations designed to help lower exposure to high risk investments may actually be undermining global financial stability. “With many first-time investors taking advantage of the relatively better economic performance of these countries, the risk of a reversal cannot be discounted if fundamentals — such as growth prospects or country or global risk — change,” according to the report. “For larger shocks, the impact of such reversals could be of the same magnitude as the pullback in flows experienced during the financial crisis.”

The full report will be released September 21.

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 General Retirement System of the City of Detroit has filed a class-action lawsuit with BNY Mellon, claiming that the firm lost more than $1 billion of its money in investments tied to Lehman Brothers.

(September 14, 2011) — BNY Mellon has been slammed with another lawsuit by Detroit pension schemes.

A lawsuit filed by the General Retirement System of the City of Detroit in Manhattan claimed that its custodian, BNY Mellon, gambled and lost more than $1 billion of its money in investments connected with Lehman Brothers. Despite Lehman’s crumbling status, BNY Mellon continued to keep the scheme’s money invested in the failing bank during 2007 and 2008.

The lawsuit, obtained by Forbes, stated: “[BNY] surprisingly took no action with respect to the Collateral investments it made on behalf of Plaintiffs and the Class. Although Defendant could have divested or otherwise hedged against losses on the Lehman Notes and other similar Lehman investments at any point during 2007 through 2008 and significantly minimized or eliminated any losses, Defendant held onto the Lehman investments. In such away, Defendant took a gamble with Plaintiffs’ and the Class Plans’ money for which it bore no risk of loss. Defendant made this gamble because under the Agreement, Defendant had no risk of loss but was paid 20% of any profit. Because of this ‘heads I win, tails you lose’ paradigm, Defendant had no incentive to modify its unauthorized and risky investment strategy, and made no attempt to do so, because it was the beneficiary of all profits, and would not be responsible for any losses.”

The group of Detroit schemes allege in its complaint that BNY Mellon urged them to join its securities lending program. According to the complaint, the funds perceived the program to be “akin to a conservative money market account.”

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A separate analysis by the Wall Street Journal recently revealed that BNY Mellon executed currency transactions for two large pensions that resulted in higher costs for the scheme while boosting its own profit. The WSJ looked into currency trades conducted by BNY Mellon between January 2007 and May 2011 for the Massachusetts Pension Reserves Investment Management fund. It also examined trades carried out by the Los Angeles County Employees Retirement Association between May 2000 and September 2010.

In recent months, the bank has been scrutinized and criticized over its approach to foreign exchange operations for pension funds. It is the target of multiple accusations of having overcharged pension funds for foreign exchange trades by failing to charge the funds the rates that the bank paid.

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