Watson Wyatt, a big consulting firm, publishes occasional roundtables with some of its analysts (this time Carl Hess, Graeme Miller and Paul Trickett). This bit, about what pension funds should be doing, contains some good advice for individual investors (bold is mine):
Q: What should pension funds’ attitude to risk be in the current environment? What should they be doing, if anything?
Miller: Watson Wyatt’s research suggests that the investment environment is likely to remain volatile for quite some time and that a number of downside risks are still present. So we believe pension funds should think carefully before increasing their exposure to risky assets right now. We are generally encouraging our clients to stick to their long-term strategies and avoid the temptation to sell assets into a weak market at distressed prices
Trickett: The dislocation in financial markets is acute and uncertainty is high over how well the world economy will cope. As Graeme [Miller] says, we believe pension funds should be cautious and stay at the lower level of their risk ranges, as the risk/reward trade-off remains unfavorable. As mentioned earlier, funds should bear in mind that the best buying opportunities typically arise before economic stabilization and recovery are clear. Pension funds should not react to short-term poor relative performance from high-quality managers. Historically, it’s often after such performances that these managers produce stronger returns. We would also caution against reactionary like-for-like manager changes, because of recent significant increases in transition costs.
Hess: I agree – funds should recognize that the cost of movement is high right now. That’s not to say they shouldn’t act if necessary, but change for the sake of change is very expensive. We are not advocating inaction, but rather planning for a world of increased investment opportunity. With fear dominating greed in investor psychology, normal risk/reward trade-offs may not apply. The pursuit of small, incremental returns while taking improbable but large-if-they-happen risks — like picking up pennies in front of a steamroller — just isn’t really attractive. To align all parties, it’s critical that funds have discussions with their investment managers to make sure they fully appreciate the risks in the current environment.
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