Infrastructure debt funds get strong support

This is what we are creating in Software. Aivars Lode

27 June 2012

The number of unlisted infrastructure debt funds has nearly doubled since 2010, boosted by surging demand from institutional investors.

According to a survey by Preqin, the number of funds has jumped from 27 in the fourth quarter of 2010 to 46 in June this year.

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The increase comes at a time when institutional investors have become increasingly aware of the benefits of using a wide range of infrastructure instruments, the company said.

It said more than 130 institutional investors in its survey had either previously committed to an unlisted infrastructure debt fund or would consider doing so in future.

"As with any new or emerging strategy," it added, "institutional investors are likely to be cautious when committing capital to infrastructure debt funds, although more investors are becoming attuned to the benefits of utilising various strategies to access the infrastructure market."

Andrew Jones, managing director for infrastructure debt at AMP Capital Investors, explained in the Preqin research that his company had noticed an increasing "acceptance and recognition" of an infrastructure debt allocation over the last 18 months.

He attributed this trend to investors becoming more risk averse and placing a greater emphasis on portfolio security.

"Suddenly, investors that were looking for 15%-plus out of an infrastructure portfolio are seeing space in their allocation strategy for a consistent 10% yield with lower risk – something they can rely upon in terms of liquidity and capital stability," he said.

Preqin said it expected interest in infrastructure debt funds to grow even further, as investors were increasingly attracted to more predictable yields with lower risk/return profiles.

It acknowledged, however, that the market would remain a niche one, pointing out that only a select few fund managers were active in the debt space.

Small Fish Burned in Facebook IPO Knew Better

By William Cohan

You know that the hand-wringing over the almost 25 percent drop in the value of Facebook’s Inc.’s stock since its May 17 IPO has reached a new level of disproportion when ABC’s “Good Morning America” weighs in with the idea that maybe Mark Zuckerberg should abandon his honeymoon and return to Silicon Valley to somehow make things better for the gullible investors who got singed.

Lots of reasons have been posited for the Facebook IPO “debacle” -- as the news media like to describe it -- including that perhaps Zuckerberg, the company’s founder and chief executive officer, and his management team failed to disclose declining quarterly advertising revenue in a timely way. Or that Nasdaq OMX Group Inc. failed to process initial purchase and sale orders properly on IPO day. Or that some underwriters passed “quiet guidance” to big, institutional investors about Facebook’s financial prospects but not to smaller investors. Or that technical “trading glitches” caused the problem. Or that Morgan Stanley (MS), Facebook’s lead underwriter, botched the whole IPO process.

The Diepersloots

Burned investors will grasp at anything -- except their own role in fueling Wall Street’s Facebook IPO hype machine -- in an effort to recoup some of the billions of dollars they have lost as the stock continues to slide. On May 23, the plaintiff’s bar got into the act by filing three separate shareholders lawsuits accusing Facebook’s management, board and underwriters of failing to provide material information about the company’s second-quarter financial performance to small investors during the roadshow, while providing the same information to some institutional investors. This, the suits claim, caused the small investors to lose more than $2.5 billion after Facebook’s IPO.

The New York Times managed to find Robert Diepersloot, a dairy farmer in Madera, California, who said the Facebook IPO “confirmed all the fears and suspicions” that led him and his wife to take all of their savings -- in the tens of thousands of dollars -- out of the stock market and invest it, instead, in real estate. (Good luck with that Mr. Diepersloot.) “We just pulled out completely,” he told the paper. “We’ve lost trust in the whole scenario.”

OK, once and for all: When will small investors finally get the message that investing in IPOs is a fool’s game and that yet again they served as mere grist for Wall Street’s IPO selling machine? The current IPO market -- controlled by Wall Street’s cartel of five or six leading firms -- exists only to benefit three groups of constituents.

Foremost are the Wall Street banks themselves, which reap hundreds of millions in fees from the IPOs whether the resulting stock price goes up or down. Either way, Wall Street makes money.

The second group consists of Wall Street’s big institutional trading partners -- the ones that provide banks with huge fees every day of the week, whether or not there is an IPO to be hyped and priced. For obvious reasons, Wall Street wants to keep these big investors happy. That is why they are sometimes given (inside) information about a company that small investors are not given -- as has been alleged in the Facebook shareholder lawsuits. IPOs are priced to put money in these big shareholders’ pockets, either by underpricing the company in the first place so that it “pops” when it begins trading, allowing the institutional shareholders to flip the stock quickly after it rises in early trading, or by giving them information that will allow them to get out fast while smaller investors are getting in.

Lowest Priority

Third on the list of priorities is the company being taken public. The Wall Street underwriters strive to get just enough value in the IPO to keep the company’s management and early investors happy, while also leaving enough on the table so institutional investors get their “pop.” Wall Street wants its IPO clients to stick around for the longer term, so that additional fees can be generated from future secondary offerings, as well as future debt offerings, mergers and wealth management services. Wall Street is engaged in a delicate balancing act between its fee interests and those of its institutional trading partners and its corporate-finance clients.

You’ll notice, of course, that small investors don’t make the list of important constituents. Their concerns are nearly irrelevant to the Wall Street cartel, despite the marketing dollars that big firms often invest in attracting small investors to their brokerage businesses. Not that banks hate small investors -- they generate fees (through churning those brokerage accounts) and they provide liquidity to the market -- for example, in the form of misplaced demand for IPOs. But Wall Street sees little point in keeping them informed or helping them make wise decisions.

That Facebook’s IPO would be a product of the Wall Street hype machine was obvious from the beginning. For at least the past 18 months -- starting perhaps with the January 2011 investment by Goldman Sachs Group Inc. (GS) into the company that valued it at $50 billion -- Facebook has been awarded one ridiculous valuation milestone after another.

It’s easy to blame Wall Street for all this hype, and it’s easy to blame Facebook’s management for whipping up the valuation frenzy. It’s also easy to blame Nasdaq for botching the orders or Morgan Stanley for mismanaging the process.

The truth is that if small investors simply remembered they are nowhere to be found on the list of important constituents for an IPO such as Facebook’s, and simply stayed away, the traditional Wall Street IPO machinery would break down. Is that a lesson that can be finally learned, once and for all?

Facebook Status Update: Silence is not Golden

It would appear that investors are losing confidence and continue to look for yield that is transparent. Aivars Lode

Silence about the fear this latest technical and pricing failure of securities markets has engendered disaffection among mainstream investors. The ones who have already pulled half a trillion dollars out of mutual funds that invest long-term in U.S. stocks, in the last five years.

He watches television talking heads deconstruct the debacle. He reads newspaper and website pontifications. He is barraged by arguments he says are well-constructed, even highly-intellectual, but fail completely at addressing human fears.

“All of the voices that I encounter on this problem, they all sound institutional, they don’t resonate. I just turn off— I being the general public. The general public doesn’t listen anymore,” says Verdi, co-founder and chief executive of the ad agency Devito/Verdi.

If you think the fallout from the Facebook IPO will end any time soon, think again. Ad executives, public relations experts, wealth managers and financial advisors say that the debacle – whereby untold scores of orders never made it from an IPO crossing system onto the market and the price of Facebook shares barely stayed above their opening price on opening day -- represents a real danger for Wall Street.

It’s more than just further plummeting of Facebook’s shares: down to $28.68 a share at midday last Wednesday. That’s a drop of 24.5 percent from its ballyhooed opening at $38 on May 18 – when mainstream investors expected to get a quick pop from putting their money into the social networking giant’s shares.

But now, a $50,000 investment is worth only $37,737. And the Facebook experience will make it harder for Wall Street and fund firms to salvage their relationships with investors who don’t live and breathe the ins and outs of trading. Investors who have day jobs that have nothing to do with finance.

“Facebook stock has plummeted since its IPO, and the company is in the midst of a crisis PR nightmare. From minute 1 of a delayed launch with Nasdaq technical problems to lawsuits swirling around, Facebook is entering a danger zone,” said Ronn Torossian, chief executive of the public relations firm 5WPR. “The court of public opinion doesn’t wait – and this downward cycle of media attention is harmful.”

So far, financial firms are doing little to address this subject. Two-and-a-half days of comment requests placed to Facebook, Morgan Stanley, J.P. Morgan and Goldman Sachs as well as a dozen major asset managers were either declined or ignored as of press-time.

“I do not see any of the major wire houses or financial firms attempting to answer client concerns with this IPO,” says Philip Cioppa, managing principal and chief investment officer at Arbol Financial Strategies.

“No one wants to be implicated if an error was made or unethical behavior is discovered,” he says. “Communication is a lost art in the financial world.”

Meanwhile, financial professionals such as Paul Franke are stepping up to the plate and calming investors who otherwise feel ignored by the rest of Wall Street.

“Over the Memorial Day weekend, nearly everyone expressed their outrage to me at the failure of the Facebook quote to rise much above the offering price of $38,” said Franke, who is director of research at Quantemonics Investing and also manages a portfolio on the social media platform Covestor.

“With nearly two years of non-stop hype building up to the offering, the Wall Street underwriters really look bad pricing the stock well above any common sense valuation when measured against the other internet companies already trading publicly,” he says.

Scared investors can be dangerous investors. Just ask Mark Martiak, senior vice president and senior wealth strategist at Premier/First Allied Securities, a New York broker and financial advice firm.

During the financial crisis of 2008, Martiak had a client who, despite Martiak’s pleas, sold out of his separately managed accounts only to lose millions, when prices turned.

“He lost his confidence and couldn’t stomach consecutive daily losses,” Martiak said.

Investors in Facebook, now behind the game by 24 percent or more, have to take a similar long-term outlook. And recognize that it will be around for a lot longer than two weeks of trading.

“Advisors need to provide assurances daily when they sense that their clients are shaken by the market’s volatility,” he said.

In fact, some say that the Facebook IPO is already creating marketing opportunities for fee-only wealth advisors who adhere to fiduciary standards regarding costs. The argument being thus: if an advisor doesn’t make money per transaction but rather from a percentage of assets, there is little incentive to repeatedly push customers into new products that could be risky.

“In general, it’s reasonable to assume that the Facebook IPO has raised questions— if not concerns— among investors regarding traditional Wall Street firms. Specifically, there’s a growing awareness that because these firms do not operate under a fiduciary standard they can -- and do -- maximize profits at the expense of their clients,” said Anderson Wozny, Director, Financial Planning, Edelman Financial Services.

What can fund firms who put clients’ assets into Facebook shares do? First off, says ad exec Verdi, acknowledge the fact that investors are scared, and then treat them like human beings.

Fidelity Investments, the mutual fund company which also runs a large brokerage, said it was working with "thousands" of brokerage clients to clear up what happened to their orders, when Facebook went public.

“With the Facebook IPO, people feel like you are messing with the American Dream a little bit. I’m supposed to be able to participate in this and not be screwed in the process,” he says. “You can’t mess with the American Dream and then expect people to participate in Wall Street.”

Also, financial services firms somehow need to develop a single voice. When dozens of different industry executives get on TV and espouse dozens of conflicting opinions on financial events, investors get confused and alienated.

“You need a voice—where is the voice of Wall Street? Before I can even listen to you, I need to trust you. That is the part many are missing,” Verdi says.

To show that it is possible for a company to handle—well—a public black eye, Verdi cited the efforts of British Petroleum to regain public trust after the oil leak disaster in the Gulf of Mexico. Little actions can have big effects, he says, like educational initiatives at local high schools. All told, the petroleum giant has poured more than $150 million into promotions to help the region recover since the Deep Horizon rig disaster two years ago.

“It’s all about perception. The reality of all of this is so much less important than the perceptions. Bad perceptions can become reality if you don’t handle them properly,” he says.

European funds cut equities in favour of alternatives – Mercer

This is why we created our alternate asset class fund focused on software yield investments. Aivars Lode

EUROPE – Pension funds in Europe trimmed allocations to equities over the last year and increased their exposure to alternative assets, Mercer's annual European Asset Allocation survey has found.

The trend away from equities is set to continue, according to the consultancy. In the UK, for example, 38.8% of schemes said they were planning to cut exposure to UK equities, while only 1.4% expected to increase it.

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Nick Sykes, European director of consulting in Mercer's investments business, said: "As the euro-zone crisis continues unabated, pension funds are faced with the dual challenge of managing portfolio risk brought on by market volatility, while at the same time identifying opportunities that will generate returns to support future liabilities.

"In their quest to control volatility without sacrificing long-term returns investors have turned their attention to alternative asset classes," he said.

Falls in overall equity holdings at European pension funds were mainly driven by cuts in domestic equity allocations, according to the report.

Funds with less than €50m in assets saw equity allocations fall to 34%  – down from 40% the year before – while at the other end of the scale, average allocations to equities at large funds with €2.5bn or more dropped three percentage points to 24%.

Pension funds are now considering investing in a wide range of alternative asset classes, the survey of more than 1,200 European funds shows. Half of the schemes surveyed now have an allocation to alternatives, up from 40% last year, Mercer said.

The largest falls in equity allocations were seen at schemes in the UK and Ireland.

Funds in these countries still have the heaviest equity weightings among European schemes, but UK allocations to domestic and non-domestic equities fell to 43% from 47% over the last 12 months, while Irish allocations dropped six percentage points to 44%, Mercer said.

The gap between the traditionally equity-heavy pension funds of the UK and Ireland and funds from other European countries had now all but vanished, Mercer observed.

Their average equity allocation was now approaching that of Belgium and Sweden, it said.

The most popular alternative investment types for European pension funds outside the UK were hedge funds, emerging market debt and high yield bonds, according to the survey, with almost 20% of schemes allocating to one or more of these areas.

Mercer said this trend was more marked for larger schemes. About 60% of funds with €2.5bn or more in assets had allocations to one or more of these asset classes, up from 40% in 2011.

The most popular alternative asset classes for UK funds were diversified growth funds, global macro hedge funds and funds of hedge funds, with 23.2%, 13.6% and 10% of schemes having allocations respectively.

Sykes said schemes were looking towards asset classes that were less exposed to the sovereign debt crisis, focusing particularly on emerging markets for both equities and bonds.

"Investors are also looking globally for yield in bond markets, since the crisis has pushed core yields in Europe to very low levels," he said.

"Liquid asset classes are also favoured, as investors value access to their assets in such turbulent times."

Author: Rachel Fixsen

There are two types of value: intrinsic value and speculative value.

Thanks Rob, thoughtful and provoking when thinking about investing. Aivars Lode
Value.

The best definition of intrinsic value is cash flow.  Pretty simple. Easy to
calculate and mostly what "fixed income" (e.g. debt, bond) markets are all
about.

The other type of value is speculative value sometimes called equity. The
most obvious manifestation of speculative value is the stock market, where
"equities" are issued, then bought and sold, over and over.

Speculative value (equity) is basically the concept of buying and selling a
title to some "asset". (The term asset is used loosely in the context of
equities.) The buyer of the title to the asset believes that in the future
there will be some event or change of perception that will allow them sell
it for more money than what they paid when they bought it. The thing backing
up the equity could be completely vacuous like an eyeball looking at a
webpage (worth speculatively millions), or a physical thing like a building,
which may have a replacement cost of say $10 million but could be be worth
zero or even have negative "equity" (you have to pay to demolish it.)

In theory, over the long term, the events that create equity value are an
increase in dividends (more on dividends in a minute) or an improvement in
the balance sheet (retained earnings, accumulation of sellable assets,
issuance of notes payable, etc.). But in the real world equities are valued
on pure perception (speculation). Actually, the second or third derivative
of perception (i.e. "I perceive now is the time to buy equities, because I
perceive that others who do not perceive now is a good time to buy equities
will down the road perceive that others will perceive that they should buy
equities in larger numbers... "ad infinitum) In other words the equity value
of an equity is derived from the belief that someone in the future will
believe that down the road further, someone will else will pay more. It is
really that simple. The real trick to equity pricing is to try to figure out
what people believe and what is likely to change their minds - 100%
psychology and like ALL FORMS of psychology, no science whatsoever - just
feelings.

I am not saying people do not love to toss around numbers in equity markets.
Is there growth in earnings? Is there growth in revenue? Is this "expected"
or not (e.g. beat the official estimates and/or "whisper numbers")? Does
this company's "equity" have the same price to earnings, or price to
revenue, ratio as a competitor of the same size, balance sheet, same growth,
same margin, etc. If not, can these discrepancies be accounted for? Does the
company pay a dividend? Is it increasing?  etc. etc. But these are just
mental masturbations The only thing that matters is playing the perception
game. This is why stocks frequently go down after a stunningly good quarter.


Equity markets move from a numeric analysis to a perception analysis in the
blink of an eye,  That is not to say the numbers do not matter to some
extent, but numbers only matter to the degree they change perception.
So-called good numbers do not always lead to a good change in perception
(again, not the first derivative). There is a ton of evidence in equity
markets that demonstrates these phenomenon, but my favorite is looking at
the stock price movements when a company "misses the quarter" could go up -
could go down - could stay the same - depending on what the expectations are
and how they changed. Hence the source of, "I buy on dips."

One other note before moving on to intrinsic value is an analysis of
dividends. For equities that pay dividends, a partial intrinsic value can be
found in the ratio of dividend amount to speculative price. But be careful,
paying a dividend actually reduces the theoretical equity value of a company
(reduces cash).  Dividend values of equities (unless the dividend is
abnormally high compared to a corporate bond) is typically a minor kicker to
the stock. Increasing dividends has a de minimis impact on equity value as
compared to speculative values (i.e. the attempt to buy low and sell high).
Sometimes an increase in dividends will move a stock, but not because of the
intrinsic value, but because it is perceived to be a signal that will be
perceived by non-believers that the company has more "good news" which will
further change perceptions in the future. I am quite serious.

Bottom line: equities are valued on speculation.

Intrinisic value is a whole 'nother kettle of fish.

Intrinsic value is almost all mathematics. Intrinsic value is simply the
cash flow generated by an "asset". The formula can be quite complex taking
into account the net present value of the cash flow and the risk the that
cash flow is not secure and steady (predictable).  But no cash flow - no
intrinsic value. Period. For investors to balance a portfolio the future
will be products that have a relatively high cash flow (yield) with
relatively low risk.  Funds that do not take equity, but accumulate "bonds"
by concentrating on securing intrinsic value claims (cash flow) via secured
structures will provide stability in an investment portfolio.  Investments
are technically more like Convertible bonds than straight debt, because of
covenants that give ultimate control of operations without a traditional
default event. Funds like this are the future unique, modern,
differentiated, not a PE, not a VC, not a traditional bank, not a
hedge-fund, etc.

There is some confusion around intrinsic value "assets" like corporate and
government bonds because, in addition to yield, they also have a "price" -
i.e. some bonds do indeed trade. Bond trading is the result of a pseudo
perceived speculative value around relative yield and relative risk.  The
factor that causes speculative changes in the price of bonds is the global
shifts in interest rate expectations (speculation) for the same level of
risk. If you own a ten year U.S. Treasury eight years away from maturity
with an intrinsic value (yield) of 2% and the market begins to speculate
that the government will next issue ten-years for 2.2%, then the "price" of
your bond will go down. Notice that the price of the bond does not change
when the new higher rate bonds are sold if the speculation on future rates
is confirmed and does not create new speculation. But this assumes you would
sell it before maturity (now). If you own a ten-year bond with one year left
to maturity the speculative impact of a change in global interest rates is
tiny. If your intent is to hold to maturity the "price" of your bond beyond
intrinsic value is irrelevant.

Consequently, intrinsic value assets that do not trade do not have
speculative value. Intrinsic value assets that do not have a maturity are
probably impossible to speculatively price objectively, anyway.  The only
objective value is the current cash flow.

Public Pensions Faulted for Bets on Rosy Returns

The truth is hitting home. There are barely any home runs for investments. Aivars Lode

By MARY WILLIAMS WALSH and DANNY HAKIM

Published: May 27, 2012

While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”

Now public pension funds across the country are facing a painful reckoning. Their projections look increasingly out of touch in today’s low-interest environment, and pressure is mounting to be more realistic. But lowering their investment assumptions, even slightly, means turning for more cash to local taxpayers — who pay part of the cost of public pensions through property and other taxes.

In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds.

But to many observers, even 7 percent is too high in today’s market conditions.

“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” Mr. Bloomberg said during a trip to Albany in late February. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”

Public retirement systems from Alaska to Maine are running into the same dilemma as they struggle to lower their assumed rates of return in light of very low interest rates and unpredictable stock prices.

They are facing opposition from public-sector unions, which fear that increased pension costs to taxpayers will further feed the push to cut retirement benefits for public workers. In New York, the Legislature this year cut pensions for public workers who are hired in the future, and around the country governors and mayors are citing high pension costs as a reason for requiring workers to contribute more, or work longer, to earn retirement benefits.

In addition to lowering the projected rate of return, Mr. North has also recommended that the New York City trustees acknowledge that city workers are living longer and reporting more disabilities — changes that would cost the city an additional $2.8 billion in pension contributions this year. Mr. North has called for the city to soften the blow to the budget by pushing much of the increased pension cost into the future, by spreading the increased liability out over 22 years.

Ailing pension systems have been among the factors that have recently driven struggling cities into Chapter 9 bankruptcy. Such bankruptcies are rare, but economists warn that more are likely in the coming years. Faulty assumptions can mask problems, and municipal pension funds are often so big that if they run into a crisis their home cities cannot afford to bail them out.

The typical public pension plan assumes its investments will earn average annual returns of 8 percent over the long term, according to the Center for Retirement Research at Boston College. Actual experience since 2000 has been much less, 5.7 percent over the last 10 years, according to the National Association of State Retirement Administrators. (New York State announced last week that it had earned 5.96 percent last year, compared with the 7.5 percent it had projected.)

Worse, many economists say, is that states and cities have special accounting rules that have been criticized for greatly understating pension costs. Governments do not just use their investment assumptions to project future asset growth. They also use them to measure what they will owe retirees in the future in today’s dollars, something companies have not been permitted to do since 1993.

As a result, companies now use an average interest rate of 4.8 percent to calculate their pension costs in today’s dollars, according to Milliman, an actuarial firm.

In New York City, the proposed 7 percent rate faces resistance from union trustees who sit on the funds’ boards. The trustees have the power to make the change; their decision must also be approved by the State Legislature.

“The continued risk here is that even 7 is too high,” said Edmund J. McMahon, a senior fellow at the Empire Center for New York State Policy, a research group for fiscal issues.

And Jeremy Gold, an actuary and economist who has been an outspoken critic of public pension disclosures, said, “If you’re using 7 percent in a 3 percent world, then you’re still continuing to borrow from the pension fund.”

The city’s union leaders disagree. Harry Nespoli, the chairman of the Municipal Labor Committee, the umbrella group for the city’s public employee unions, said that lowering the rate to 7 percent was unnecessary.

“They don’t have to turn around and lower it a whole point,” he said.

When asked if his union was more bullish on the markets than the city’s actuary, Mr. Nespoli said, “All we can do is what the actuary is doing. He’s guessing. We’re guessing.”

Vermont has lowered its rate by 2 percentage points, but for only one year. The state recently adopted an unusual new approach calling for a sharp initial reduction in its investment assumptions, followed by gradual yearly increases. Vermont has also required public workers to pay more into the pension system.

Union leaders see hidden agendas behind the rising calls for lower pension assumptions. When Rhode Island’s state treasurer, Gina M. Raimondo, persuaded her state’s pension board to lower its rate to 7.5 percent last year, from 8.25 percent, the president of a firemen’s union accused her of “cooking the books.”

Lowering the rate to 7.5 percent meant Rhode Island’s taxpayers would have to contribute an additional $300 million to the fund in the first year, and more after that. Lawmakers were convinced that the state could not afford that, and instead reduced public pension benefits, including the yearly cost-of-living adjustments that retirees now receive. State officials expect the unions to sue over the benefits cuts.

When the mayor of San Jose, Calif., Chuck Reed, warned that the city’s reliance on 7.5 percent returns was too risky, three public employees’ unions filed a complaint against him and the city with the Securities and Exchange Commission. They told the regulators that San Jose had not included such warnings in its bond prospectus, and asked the regulators to look into whether the omission amounted to securities fraud. A spokesman for the mayor said the complaint was without merit.

In Sacramento this year, Alan Milligan, the actuary for the California Public Employees’ Retirement System, or Calpers, recommended that the trustees lower their assumption to 7.25 percent from 7.75 percent. Last year, the trustees rejected Mr. Milligan’s previous proposal, to lower the rate to 7.5 percent.

This time, one trustee, Dan Dunmoyer, asked the actuary if he had calculated the probability that the pension fund could even hit those targets.

Yes, Mr. Milligan said: There was a 50-50 chance of getting 7.5 percent returns, on average, over the next two decades. The odds of hitting a 7.25 percent target were a little better, he added, 54 to 46.

Mr. Dunmoyer, who represents the insurance industry on the board, sounded shocked. “To me, as a fiduciary, you want to have more than a 50 percent chance of success.”

If Calpers kept setting high targets and missing them, “the impact on the counties won’t be bigger numbers,” he said. “It will be bankruptcy.”

In the end, a majority decided it was worth the risk, and voted against Mr. Dunmoyer, lowering the rate to 7.5 percent.

Volatility hitting corporate yields, not just gilts – Mercer

Private entitles where earnings are transparent may be an alternative source of low risk yield. Aivars Lode

UK – Market volatility seen this May has led to the largest single month-on-month increase in pension deficits in nearly two years, according to a Mercer analysis of UK pension funds.

Speaking with IPE, pension risk group leader Ali Tayyebi noted that, unlike the euro-zone related turbulence of last August, current doubts over Greece's ability to stay within the single currency had also impacted corporate bond yields.

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"Although trustee funding calculations will be different to company accounting figures – because different assumptions are required – market conditions currently are placing more or less identical pressures on them, so trustees will be considering how to react to similarly bad news," he said.

Tayyebi said the impact of the sovereign debt crisis in the autumn of last year had presented different symptoms – with only government debt yields falling, while corporate rates remained stable.

"The trend now appears to be contrary to the increase in the perceived risk of corporate bonds as measured by credit default swaps and could be due to the significantly reduced issuances of corporate bonds in recent months," he said.

He said while Mercer was unsure of the exact underlying causes, the effect was that pension fund deficits had risen to levels last seen two years ago, with the biggest single rise in funding shortfalls since August 2010.

Mercer added that the ongoing crisis had exacerbated the "perceived safe-haven status" of the UK, with 20-year fixed interest gilt yields falling to 2.76% at the end of last week – bringing it close to the lowest point seen all year.

The consultancy estimated that, as a result of declining yields, deficits in FTSE 350 companies had increased by around a quarter, rising by £25bn (€31bn) to £94bn.

The figures are roughly in line with rival Towers Watson's calculations, although the latter consultancy estimated a steeper overall increase since the beginning of May – with deficits up by £30bn.

Despite this, Mercer and Towers Watson disagreed on the overall size of the 350 companies' deficits, with Towers Watson estimating a shortfall of only £92bn.

Author: Jonathan Williams