Understanding the Pros and Cons of Pension Fund Investing - the Issue Applied to Asian Investments

Implications: 1.    Investing in Asia has three benefits.  First, there are the returns from investing in environments that show greater growth potential than in the West. Second, there are the returns from investing in opportunities denominated in currencies that are forecasted to appreciate. Three, there is the benefit of diversification. 2.     The costs, or risks, of investing in Asia are threefold: First, there is the risk that high growth opportunities present. Second, there is the risk of investing in a depreciating, not appreciating currency. Third, there is the asset-liability risk inherent in all financial intermediaries, particularly pension funds.

Analysis: The lure of investing in Asian opportunities is obvious.  Asia is a growth market denominated in currencies that are projected to appreciate.  Likewise, any good portfolio should have a well thought-out strategy of global diversification.  However there are costs and risks.  Most investors recognize the costs, or risks, associated with growth markets and currency markets.  However, when pension funds invest, pension fund managers must also deal with asset-liability issues.

Pension funds managers can no longer simply maximize return for a given level of risk imbedded in the assets.  Pension fund managers must also recognize that they must consider the duration of investments versus the duration of the pension labilities.  Investing in private equity is a challenge.  However the question becomes, "How does this investment match up with the source of funds?" 

This issue is not just for public pension funds, as addressed in this article.  It is also an issue that all pension fund managers must address (e.g., corporate).   Society must accept the risk for poorly managed public pension funds.  Corporate shareholders must  accept the risk of poorly managed corporate pension funds.