In Pursuit of the ROA and the Long-term Implications

We’ve suggested for years that the pursuit of the return on asset (ROA) assumption as the primary goal of pension America was misguided and the latest market events certainly support our point. As plan sponsors and their asset consultants chased the ROA the asset allocation strategies pursued more products that were private in nature – equity, debt, real estate, infrastructure, etc. The hope of more return has likely not been realized and we may soon find out that true valuations have been masked. We certainly understand that pension plan liquidity has been diminished significantly.

With regard to private equity valuations, according to a new report from Investec, “private equity is about to go through a period of violent repricing matched only by the collapse in the global financial crisis: some 50% over the next 3 months!”

In the report from Investec’s Fund Finance team, authors Michael Zornitta and Ian Wiese write “that valuations will fall this month, with major adjustments downward foreseen in June reporting, and that hedging transactions are on the rise as risk management becomes the priority for fund managers. Just one problem: one hedges before the crisis, not after.”

According to the folks at Investec, “almost all managers have shifted their focus from deploying capital to defending assets,” Zornitta and Wiese wrote. Managers are looking into alternative forms of liquidity to prop up companies, prevent breaches and reduce the possibility of having to call any remaining capital” from investors, they wrote.

DB plans have seen substantial re-pricing for traditional domestic and international equities, and high yield. A repricing of anything near the 50% prediction by Investec will be devastating. We encourage all plans to once again focus on the promise that has been made to your participants (liabilities) to drive asset allocation and invest structure decisions, and to get away from chasing the ROA as if it were the Holy Grail. It is nothing more than a tarnished artifact!

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