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.