Public Pension Investing in Europe

Market uncertainty typically paves the way for new investment strategies and what is happening abroad is no exception. In a recent article entitled "State pension eyes European chaos for opportunity," journalist Rob Varnon (Connecticut Post, May 23, 2012) writes that the State of Connecticut has soft circled $50 million to allocate to a so-called "opportunity fund" that has its eyes on "European distressed and defaulted debt."

I am quoted as saying that "Investing in Eurozone sovereign debt by institutional investors with a long-term focus may make sense" as long as a pension fund carefully weighs "the risks against the expected returns." I added that many of these opportunity funds are new which means that there is no track record available to review.

Besides liquidity risk, I cited the political will to adopt austerity measures as being variable across borders yet critically important to assess.

Finally, I emphasized the "we are one" aspect of global capital markets, namely that what happens in Europe is unlikely to stay in Europe. U.S. pension plans are almost sure to be impacted. For one thing, trading sentiment is seldom self-contained these days, a trend that is reflected in record high correlation coefficients for various equity and fixed income venues. Second, a pension plan could be already invested in U.S. multinational companies that heavily rely on European economic growth (or lack thereof) to generate sales and profitability. By investing further in European opportunity funds, a U.S. pension fund adds to that exposure and thereby lessens the extent to which it is diversifying geographically.

Continental Europe is not the only region beckoning to Yankee pension funds. According to "China may give foreign pension funds new investment opportunities" by Amy Li (Wall Street Journal, May 15, 2012), authorities are thinking about a mechanism to expand outside capital infusions. Other cited possibilities include the allowance of hedge funds to invest and for certain parties to be able to "open new yuan-denominated onshore bank accounts."

An important factor to consider, among many, is that "boots on the ground" can make an invaluable difference in helping pension fiduciaries to adequately vet non-U.S. partners. International investing has its own set of challenges and getting local help can make sense.

Source: http://feeds.lexblog.com/~r/PensionRiskMatters/~3/Pu_mhQoZwx8/

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