Combating Pension Fund Failure

Updated on

Brandywire Asset Management report for the month ended October 31, 2016; titled, “Combating Pension Fund Failure”

Wilshire: State Pension Plans 74% Funded

In their “2016 Report on State Retirement Systems” released earlier this year, Wilshire Consulting reported that out of 131 state retirement systems, 93% were underfunded, with an average ratio of assets-to-liabilities of 74%. While this is not exactly news – the crisis of underfunded pension plans has been with us for a number of years – the persistence of the problem should be cause for concern. That is because:

  • The average fund is 47% invested in publicly-traded equities and 23% in fixed income securities, and
  • Both stocks and bonds have staged significant – even historical – rallies over the past 7 years. The assets-to-liabilities ratio has not enjoyed a corresponding increase.

We discuss the pension funding dilemma in this month’s report.

The Pension Fund(ing) Dilemma

As the Wilshire report mentioned above points out, state pension plans are significantly underfunded and at risk of requiring sizable contributions from their states to enable them to meet retiree benefits. Corporate pension plans are in a similar, although slightly less dramatic, predicament. This is despite the plans having their largest allocation to public equities, which has averaged double-digit returns since the stock market nadir more than seven years ago, and their second largest allocation to fixed income, which has been in a multi-decade bull market.

Many plans have attempted to fill this funding/performance gap by diversifying their portfolios into hedge funds. But after years of underperformance by hedge funds relative to stocks, we are starting to see reports of pensions reducing those hedge fund investments and adding still more to their stock allocations, specifically low-cost index funds.


There are a variety of reasons to replace specific investments within pension plans. Certainly, if a hedge fund is invested in stocks similar to those of an index fund, yet charges high fees to make that investment, it may not be providing any real diversification value and could, arguably should, be replaced. But it is unnecessary to increase risk further by shifting even more of a portfolio to stocks, which are already trading at record highs. There are options available to truly diversify a pension portfolio that can result in both reduced risk and increased returns.

Adding globally-diversified systematic (to ensure a repeatable process) investment programs – ones that provide truly uncorrelated returns – to every pension fund’s portfolio has the potential to both increase return and also reduce exposure to a stock market decline. This is Brandywine’s area of expertise, honed over 35 years of investment research and trading. As the charts at the top of the next page show, including Brandywine in a conventional 60-40 portfolio may substantially increase both absolute and risk-adjusted returns.

As always, please contact us with any questions or opportunities you may have.

Including Brandywine Increases Both Absolute and Risk-Adjusted Returns

Pension Fund Failure

(Non) Correlation (highlighted in red in table at right) of Brandywine’s Investment Programs to Other Investment Indexes

It is this non-correlation – combined with Brandywine’s repeatable investment process and broad strategy and market diversification – that makes Brandywine such a positive addition to most investment portfolios.

Pension Fund Failure

Descriptions of the Brandywine Investment Programs

Brandywine trades pursuant to a fully-systematic model that incorporates a wide range of both fundamental and technical trading strategies. Brandywine’s Symphony Program began trading in July 2011 and the performance of the other programs is extracted from the actual performance of trades executed within the Brandywine Symphony Program. “Brandywine CPU” is the composite performance that could have been achieved by allocating across all four Brandywine programs.

Diversified Portfolios

Brandywine Symphony

Brandywine’s most broadly diversified investment program:

  • Trades in all liquid global financial and commodity futures markets (well over 100 markets)
  • Trades pursuant to all Brandywine’s trading strategies

Brandywine Classic

Similar to Symphony

  • but excludes trading in Brandywine’s fundamental value strategies

Brandywine CPU(1)

  • Allocates across the four Brandywine Programs

Specialized Portfolios

Brandywine Monetary

Trades financial markets only:

  • Trades in all liquid global currency, interest rate and stock index futures markets (over 60 markets)
  • Trades pursuant to all Brandywine’s trading strategies relevant to the financial markets

Brandywine Alpha Hedge

Comparable to diversified technical trend following CTAs:

  • Trades in more than 100 global financial and commodity futures markets (well over 100 markets)
  • Trades only pursuant to Brandywine’s alpha hedge (momentum-based) trading strategies

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See the full PDF below.


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