Chapter 13

The Pensioner

We thought it only fair to speak to a real money manager who did not lose money in 2008. Despite the difficulty in finding such a manager, I finally unearthed “The Pensioner,” who runs a major portfolio for one of the largest pension funds in the world. He invests by seeking out risk premia in equities, commodities, fixed income and currencies, and uses quantitative tools and discretionary analysis to build a diversified basket of assets with a global focus.

His views on the business are timely and important. According to the Pensioner, portfolio construction needs to be revisited in its most basic forms, where Markowitz and CAPM might still be valid, but not in the way these theoretical concepts have been applied to pension fund management in recent years. In short, he challenges some of the most basic assumptions behind real money investment, but he does so from the vantage of someone who fully understands the complex web of constraints that pension managers face.

The Pensioner says real money investors, on average, are led astray at the beginning the portfolio construction process by focusing on a return target. Managing to a stipulated return target means that the level of risk assumed to achieve that target becomes secondary. Taken to an extreme, “if the return requirement were 20 percent, then you would have to put all your money in microcap stocks and just pray like hell.” It is time to begin a dialogue about how real money managers can construct ...

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