Playing Defense in a Punishing Market

Abstract

High equity allocations were a boon for pension funds during the incredibly prosperous 1990s, but the deteriorating markets of the past two years have put many pension funds and endowments in a vulnerable position. Responsible fund managers should now start playing defense. Analyzing how the asset allocation of a typical pension fund today would have fared in five poor equity market scenarios over the past 30 years, the author demonstrates how severe the damage would have been. These results underscore the benefit of a more defensive asset strategy featuring a smaller equity allocation and more alternative investments. A fund structured in this manner could outperform a typical pension fund across a wide range of bear market scenarios.