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Unrealistic For Most

11th November 2014

An article in the FT yesterday entitled “Pension funds target ‘unrealistically’ high returns” summarises analysis prepared by Create Research of 190 pension schemes with combined assets of €1.9 trillion. The report finds that the median return target for European pension schemes to be 5%, which it deems “unrealistic.”

Whilst we would agree that 5% might be an ambitious target for anyone following “the herd”, one does not need to wander too far afield to find returns well in excess of 5%. For example, if trustees are willing to invest in illiquid assets, direct lending and bank regulatory capital strategies are generally providing yields above 8% on a secured basis. Even the nascent field of peer-to-peer lending is typically generating returns above 6% with capital at work for only three years or less. On the more liquid end of the spectrum, a basket of US master limited partnerships (MLPs), providing exposure to the growth in US energy infrastructure, is currently providing a yield of approximately 6-7%. While the total returns may vary, we believe the yield does provide a good guide for long-term returns for these strategies.

The article quotes a contributor to the report as saying “It is difficult to get returns in excess of 5 per cent without aggressive risk taking via shorting or leverage.” We agree that it is difficult. It requires diligence, focus and a willingness to move away from what everyone else is doing – which is focusing on stocks and bonds. With a portfolio that is properly diversified across non-traditional strategies, there is nothing unrealistic about achieving above-average returns.