If anyone has reason to pray that the current equity rally holds, it is the world’s active fund managers who need investors to return to the folly of betting on outperforming the markets rather than the uninspiring but reliable business of cutting costs.
Pension funds, particularly those where the employer bears most of the risk of making good on promised payouts, are hurting after more than a decade of poor market returns.
In Britain, for example, pension funds which promise to pay a fixed percentage of workers’ final salaries are woefully underfunded. If you use a more conservative government bond yield to value the funds, the top 200 firms in Britain needed a whopping 120 billion pounds to be considered fully funded, according to consultants Aon Corporation.
This is not the result of some unforeseeable economic storm but instead the fruit of two related delusions; that a prudently managed portfolio can expect to get a return of 8 percent a year or so over the long run, and that individual funds can maximize their returns by choosing the right active fund manager who will outperform even that optimistic benchmark.