James Saft

Negative rates and pension pain

Aug 14, 2012 04:04 UTC

By Jim Saft

(Reuters) – One of the overlooked victims of the fall and fall of interest rates are corporate pension plans which are facing a ballooning liability even as returns stay tepid.

That’s because market rates play a key role in valuing pension plan liabilities, and the lower they go the tougher things get for underfunded plans.

This may, over time, become a real issue for equity markets, as investors realize that purchases of shares bring not just a right to benefit from future streams of earnings but also the responsibility to meet potentially huge future streams of retiree payouts.

This is a big and growing problem, and a widespread one, with companies in the mature economies like the U.S. and Britain among the worst affected. The combined pension fund deficit of 1500 leading U.S. companies hit a record $689 billion in July, according to consultants Mercer, rising by $146 billion in that month alone. That leaves the companies just 70 percent funded.

Similarly, defined benefit pension plans in Britain, those which promise a certain payout, had a combined deficit of $416 billion, according to the UK Pension Protection Fund. Nearly 84 percent of such plans have a funding deficit.

The agony of rebalancing

Aug 2, 2012 20:49 UTC

By James Saft

(Reuters) – Portfolio rebalancing is one of those things which sounds sensible until you actually have to do it.

At which point, it usually just seems terrifying.

Portfolio rebalancing — the art of selling what has gone up and buying what has gone down — has a good track record along with lots of research backing up the assertion that it, in aggregate, will improve investors’ portfolio returns.

But the most crucial and high-value opportunities to rebalance usually come at exactly the kinds of times when even rational investors feel like hiding under their desks. Imagine a market crash, where you lose 8 or 10 percent of your portfolio and then, being a sensible investor, realize that right now is the time to sell the bonds that have held their value and load up on equities.

central bank or hedge fund?: James Saft

Aug 2, 2012 04:01 UTC

By James Saft

Aug 2(Reuters) – Switzerland is rapidly turning into a large
hedge fund with a small country attached.

Switzerland on Tuesday revealed its foreign exchange
reserves now total 365 billion francs ($374 billion), a rise of
50 percent in just three months and taking it to a dizzying 62
percent of Swiss annual output. A small Alpine country with a
big banking industry is now the world’s sixth-largest reserves
holder, behind only much larger or resource-rich countries like
China, Japan, Russia and Saudi Arabia.

The reason: the Swiss National Bank’s strategy of imposing a
cap on the value of the franc against the euro, a
policy which obliges it to buy euros in unlimited amounts when
the exchange rate hits its line in the sand of 1.20 francs to
the euro.