![]() ![]() While they make up a small part of most pension-plan assets, they grow to provide more diversity. In addition to the above, investing in infrastructure, like public or private developments involving power, water, roads, and energy, are another option. “The goal is to create a portfolio of properties that combine equity appreciation with a rising stream of inflation-adjusted income to balance the ups and downs of the markets.” “Long-term investments are in commercial real estates, such as office buildings, industrial parks, apartments, or retail complexes,” he continues. “Some pension funds run real estate development departments to participate directly in the acquisition, development, or management of properties.” “Pension fund real estate investments are typically passive investments made through real estate investment trusts (REITs) or private equity pools,” writes Whiteside. “Private-equity fund managers charge high fees based on promises of above-market returns.” Real Estate “In its purest form, private equity represents managed pools of money invested in the equity of privately-held companies with the intention of eventually selling the investments for substantial gains,” Whiteside clarifies. Pension funds are one of the largest sources of capital for the private equity industry,” writes Whiteside. As such, they are classified as accredited investors that invest in private equity - “a long-term, alternative investment category suited for sophisticated investors. Pension funds are institutional investors. “The prime difference here is that the institutional share classes do not have front-end sales commissions, redemption, or 12b-1 fees, and they charge a lower expense ratio,” explains Whiteside. If not, they follow the direction of individual investors and invest in mutual funds and exchange-traded funds (ETFs). While larger funds, such as CalPERS, self-manage their stock portfolios, smaller funds generally turn to outside management. The search for higher returns has pushed some fund managers into riskier small-cap growth stocks and international equities.” “Managers traditionally focus on dividends combined with growth. blue-chip common and preferred stocks are a major investment class for pension funds,” Whitside states. As of March 2020, approximately one-third of its $385.1 billion portfolios were allocated to fixed-income investments. This just so happens to be the largest pension in the U.S. “However, the risk associated with those securities tends to be quite a bit greater than typical corporate or government bonds.”Īn example of this is the California Public Employees’ Retirement System (“CalPERS”). “Portfolios including asset-backed securities (ABS), such as student loans and credit-card debt, are increasing,” he adds. “Investment managers seeking higher returns than what is available from conservative fixed-income instruments have expanded into high-yield bonds and well-secured commercial real estate loans.” Treasury securities and investment-grade bonds are still a key part of pension fund portfolios,” notes Whiteside. When it comes to pensions, in particular, Eric Whiteside writes for Investopedia that pension funds typically go to the following asset classes. For example, if stock prices drop rapidly, you can offset those losses with bonds. It’s a simple and effective way to reduce risk and play to different market strengths. Smart investors will typically make use of all four assets in order to diversify a portfolio. Real Estate and Commodities: owning property, natural resource commodities, and precious metals like gold or silver.Cash and cash equivalents: money that you have in a savings account or cash you have on-hand.Fixed Income (debt): lending money to a company or government to earn money from interest, think government bonds.Equities (stocks): owning a piece of a company. ![]() While asset classes can further be broken down into sub-classes, such as location or size, the four primary classes are: They also behave similarly in the marketplace and how they’re regulated. The reason is that thill will diversify investments and allow for a high-enough rate of return.Īn asset class is simply a group of financial investments that have similar financial characteristics. More recently, pension funds need to be invested in a variety of asset classes. ![]() Thanks to changing market conditions, though, that’s changed. Traditionally, that means government securities, blue-chip stocks, and investment-grade bonds. Instead, they’ve invested contributions into a pool of funds. Your employer isn’t keeping your pension hidden in their mattress or a savings account. Where’s My Money? Where is my pension money? This is the most common questions that come about when investing in a pension plan. ![]()
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