Gretchen Tai: Peradventure The Best Fund Director You Lot Accept Never Heard Of
Please note: much to my surprise these returns are only genuine. I was originally skeptical. I am at nowadays convinced.
Influenza A virus subtype H5N1 lilliputian spell agone I worked through HP's defined make goodness pension fund - trying to locomote out how underfunded it is (and so locomote out the truthful debt levels at Hewlett Packard). Most defined make goodness funds are underfunded. They assume 8% returns inward their actuarial assumptions together with are ii thirds are invested inward debt. (It is of course of teaching impossible to learn long term returns inward debt substantially inward a higher house the starting yield.)
Whilst I was looking for funded condition what caught my oculus were the real fine returns they had on assets - peculiarly inward the U.S. defined make goodness fund - together with peculiarly over the past times 3 years. I can't quite locomote out how they make it.
I tried to compare the fund to other large endowments (Harvard) together with also real large similar pension funds (Ford). This comparing is made harder because Harvard together with Yale bring thirty June remainder dates, Ford has a year-end remainder appointment together with Hewlett Packard has an halt of Oct remainder date. This departure inward remainder appointment is peculiarly of import for the 2009 twelvemonth which includes to a greater extent than of the crisis together with less of the bounce for Oct balancing funds than Dec balancing funds.
I would honey to learn farther dorsum - when doing this analysis - but it is a lilliputian hard. The size of the property puddle roughly doubled inward August 2008 when Hewlett Packard acquired EDS together with combined the asset-pool for their defined make goodness funds.
This post goes through the diverse HP Form 10Ks together with diverse press articles quoting the Chief Investment Officer (Gretchen Tai) together with tries to slice together how they make it.
Returns to Oct 2009
Here is a tabular array outlining returns of the 3 nous pools inward the twelvemonth to Oct 2009 (downplays the genius:
"To live on honest, nosotros weren’t timing the market. HP had decided to freeze the U.S. DB plan, which at the fourth dimension was 106% funded and, equally a result, nosotros decided amongst our senior management that an immunization strategy was the correct strategy going frontwards fifty-fifty amongst pension expense considerations; so, inward Nov 2007, nosotros decided to motion out of world equities together with into fixed-income together with hedged out interest-rate exposure 100%. Although it wasn’t our nous consideration, timing of the strategy was fortunate: We were non only able to maintain our funding condition through the fiscal crisis, but also it improved significantly due to potent returns from fixed-income portfolios equally good equally the interest-rate hedges.
This is the sort of out-there-genius moves that I would non fifty-fifty believe unless it was stated contemporaneously together with backed past times neat numbers. But it was stated contemporaneously. [The 2008 returns were non then vivid though - but they included the EDS innovation that was acquired but earlier the peak of the crisis. Gretchen Tai can't live on held responsible for that.]
Chief Investment Officer periodical clearly knows the of import talent they had when they interviewed Ms Tai. She warrants a flattering cartoon of her dressed equally but about sort of post-modern superhero leader:
How does Gretchen Tai make it?
I can't uncovering anywhere a detailed disclosure of the assets held past times the Hewlett Packard defined make goodness plan. However Hewlett Packard has moved most of the management of the defined contribution innovation inward house. This is mentioned inward the inward a higher house mentioned press article where she compares the returns of defined make goodness plans (mostly good) to defined contribution plans (mostly poor) together with says that the departure is professional person management. To quote:
We also learn by the company’s DC plan. HP 1 time again is beingness genuinely progressive here. Marketwide, defined make goodness innovation returns are then much meliorate than defined contribution returns inward historical performance—mostly because you lot bring professionals looking afterwards DB assets, together with non looking afterwards DC plans. With $15 billion inward U.S. 401(k) assets, however, nosotros genuinely desire a fresh oculus on the plan—we desire it to live on globe class. To make this, we’ve tried to eliminate usual funds from the investment options, to lower fees. You won’t come across build holler usual funds inward our plans—we desire participants to focus much to a greater extent than on property allotment decisions than picking usual fund managers. Because our innovation is then large, nosotros oftentimes tin make the axe role a custom fund-of-funds approach for each offering—which allows our participants to learn the benefits of diversification without doing a lot of work."There are clearly a bunch of fund managers Gretchen outsources to - but non "brand holler usual funds". Hewlett Packard also bought the defined contribution plans of EDS inward describe of piece of job solid (which saved money). To quote another press article:
HP officials spent the fourth dimension inward betwixt non only analyzing the elements of both DC plans but also developing a strategy to trim costs, consolidate tape keepers together with trim redundant options.
HP has achieved “significant savings” past times consolidating providers together with using the combined plan's size to negotiate lower fees, said Ms. Tai, who declined to quantify the savings. For but about investment options, Ms. Tai said HP uses the same managers for its DC innovation equally its defined make goodness plan, but she declined to seat the managers or the assets they manage.It is a compassion she "declined to seat the managers or the assets they manage". I am sure many of my readers would honey to know how to uncovering property managers similar that.
However the defined contribution innovation publishes a form 11-K - which details the portfolio together with the returns on it. Unfortunately that has a Dec remainder appointment together with then the numbers are non strictly comparable.
That defined make goodness innovation - for the twelvemonth ended Dec 2011 - had almost $14 billion inward assets available for distribution:
 | ||||||||
We bring $558 1 chiliad one thousand of negative returns on $14195 1 chiliad one thousand of starting assets. That is roughly minus 3.9 percent.
There are a few obvious differences. The defined contribution fund contained $561 1 chiliad one thousand inward Hewlett Packard shares which were a real pitiable performer. They moved from roughly $42 to roughly $27. That lonely would describe of piece of job organisation human relationship for roughly one-half the loss - but can't describe of piece of job organisation human relationship for anything similar the departure inward performance.
The departure inward remainder appointment clearly accounts for much more. For example the S&P returns for the twelvemonth until Oct 2011 were 8.1 percent. They were only 2.1 percent inward the twelvemonth until December. The xx twelvemonth bond was 15.4 percent inward the twelvemonth until October. It was 28.8 percent inward the twelvemonth until December.
Lower equity returns clearly affair equally the defined contribution fund was carrying iv billion inward straight off equity investments (a real long listing indeed) together with but about other few billion inward indirect equities (mostly index funds).
The higher long-bond returns clearly don't affair much equally the fund is strangely bereft of long bonds - carrying huge amounts of mortgaged backed newspaper (mostly Fannies, Freddies, Ginnies etc).
In other words the defined contribution fund was non equally good positioned equally the defined make goodness funds together with did non perform equally well, together with I can't role the defined contribution fund to solve the inquiry of how Gretchen Tai does it.
The Ford fund equally a comparison
Here are the Ford returns for calendar 2009 (from the 2009 twelvemonth shape 10K):
Pension Benefits | ||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Worldwide OPEB | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Change inward Plan Assets (a) | ||||||||||||||||||||||||
Fair value of innovation assets at Jan 1 | $ | 37,381 | $ | 45,696 | $ | 14,707 | $ | 21,396 | $ | 2,786 | $ | 3,875 | ||||||||||||
Actual render on innovation assets | 4,855 | (4,480 | ) | 1,692 | (2,036 | ) | 792 | (1,011 | ) | |||||||||||||||
Company contributions | 136 | 138 | 968 | 1,209 | — | — | ||||||||||||||||||
Plan player contributions | 27 | 25 | 80 | 101 | — | — | ||||||||||||||||||
Benefits paid | (3,908 | ) | (3,960 | ) | (1,456 | ) | (1,380 | ) | (62 | ) | (77 | ) | ||||||||||||
Settlements | — | — | (1 | ) | (58 | ) | (3,517 | ) | — | |||||||||||||||
Foreign telephone substitution translation | — | — | 1,581 | (4,510 | ) | — | — | |||||||||||||||||
Divestiture | — | — | — | (3 | ) | — | — | |||||||||||||||||
Other | (34 | ) | (38 | ) | (7 | ) | (12 | ) | 1 | (1 | ) | |||||||||||||
Fair value of innovation assets at Dec 31 | ||||||||||||||||||||||||
In that twelvemonth Ford produced $4855 1 chiliad one thousand on starting assets of $37381 1 chiliad one thousand or 13.1 percent. That is a long agency below the 20.6 percent produced past times Hewlett Packard inward their 2009 year.
Moreover Ford had the wages this twelvemonth of a Dec twelvemonth halt (and thus includes less of the crisis together with to a greater extent than of the recovery inward their numbers). This wages is offset past times the real weak long bond at the halt of calendar 2009 equally the money-printing inflation fearfulness was peaking.
Ford also gives us an asset-mix disclosure for the U.S. fund. It is genuinely fairly similar to HP (but carries to a greater extent than detail):
U.S. Plans | 2009 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Asset Category | ||||||||||||||||
Equity | ||||||||||||||||
U.S. companies | $ | 8,675 | $ | 26 | $ | 15 | $ | 8,716 | ||||||||
International companies | 8,413 | 48 | 92 | 8,553 | ||||||||||||
Commingled funds | — | 386 | 3 | 389 | ||||||||||||
Derivative fiscal instruments (a) | (1 | ) | — | — | (1 | ) | ||||||||||
Total equity | 17,087 | 460 | 110 | 17,657 | ||||||||||||
Fixed Income | ||||||||||||||||
U.S. government | 2,340 | — | — | 2,340 | ||||||||||||
Government-sponsored enterprises (b) | — | 1,310 | 7 | 1,317 | ||||||||||||
Government – non-U.S. | — | 449 | 256 | 705 | ||||||||||||
Corporate bonds (c) | ||||||||||||||||
Investment grade | — | 8,403 | 85 | 8,488 | ||||||||||||
High yield | — | 1,152 | 15 | 1,167 | ||||||||||||
Other credit | — | 33 | 21 | 54 | ||||||||||||
Mortgage-backed together with other asset-backed | — | 1,488 | 278 | 1,766 | ||||||||||||
Commingled funds | — | 338 | — | 338 | ||||||||||||
Derivative fiscal instruments (a) | (8 | ) | (149 | ) | (42 | ) | (199 | ) | ||||||||
Total fixed income | 2,332 | 13,024 | 620 | 15,976 | ||||||||||||
Alternatives | ||||||||||||||||
Private equity (d) | — | — | 1,005 | 1,005 | ||||||||||||
Hedge funds (e) | — | — | 1,986 | 1,986 | ||||||||||||
Real estate (f) | — | — | 1 | 1 | ||||||||||||
Total alternatives | — | — | 2,992 | 2,992 | ||||||||||||
Cash together with cash equivalents (g) | 7 | 1,864 | — | 1,871 | ||||||||||||
Other (h) | (62 | ) | 26 | (3 | ) | (39 | ) | |||||||||
Total assets at fair value | $ | 19,364 | $ | 15,374 | $ | 3,719 | $ | 38,457 | ||||||||
_______
That is close 45 percent equities - slightly to a greater extent than than HP - which should live on favourable to returns because equities were the meliorate performing property class.
Here are the returns for the 2009 calendar twelvemonth of diverse indices to compare:
| 2009 | |
| S&P 500 Total Return (incl. Dividends) | 26.5% |
| MSCI Global ex US | 37.4% |
| Barcap iShares 20+ Year Treasury Bonds | -24.7% |
| Barcap iShares 3-7 Year Treasury Bonds | -4.7% |
| Barcap iShares Short Treasury Bonds | -0.2% |
| Barcap Intermediate Investment Grade | 7.3% |
| SPDR Barclays High Yield Bonds | 19.8% |
| Ishares iBoxx Investment Grade Corporate Bonds | 2.5% |
Equities gave 30ish percent (depending on the per centum that was foreign), junk bonds close xx percent, corporates close vii percent together with longer treasuries were sharply negative the Ford render of thirteen percent seems close right. Nothing special - but for certain non bad.
Ford's 2010 twelvemonth looks considerably meliorate than benchmark at Ford:
Pension Benefits | ||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | Worldwide OPEB | ||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Change inward Plan Assets (a) | ||||||||||||||||||||||||
Fair value of innovation assets at Jan 1 | $ | 38,457 | $ | 37,381 | $ | 17,556 | $ | 14,702 | $ | — | $ | 2,786 | ||||||||||||
Actual render on innovation assets | 5,115 | 4,855 | 1,487 | 1,695 | — | 792 | ||||||||||||||||||
Company contributions | 135 | 136 | 1,236 | 962 | — | — | ||||||||||||||||||
Plan player contributions | 23 | 27 | 47 | 80 | — | — | ||||||||||||||||||
Benefits paid | (3,704 | ) | (3,908 | ) | (1,281 | ) | (1,456 | ) | — | (62 | ) | |||||||||||||
Settlements | — | — | — | (1 | ) | — | (3,517 | ) | ||||||||||||||||
Foreign telephone substitution translation | — | — | (356 | ) | 1,581 | — | — | |||||||||||||||||
Divestiture | — | — | (66 | ) | — | — | — | |||||||||||||||||
Other | (66 | ) | (34 | ) | (8 | ) | (7 | ) | — | 1 | ||||||||||||||
Fair value of innovation assets at Dec 31 | $ | 39,960 | $ | 38,457 | $ | 18,615 | $ | 17,556 | $ | — | $ | — | ||||||||||||
Starting assets were $38457 1 chiliad one thousand together with actual returns were $5,115 million. That is 13.3 percent.
In this example but about of the returns are attributed to gains on Level 3 assets. There is a tabular array of these which shows that at the start of 2010 at that spot were $3719 inward floor 3 assets. The gains on these were 522 of gains on them . Net of this the portfolio produced $4593 1 chiliad one thousand (5115-522) inward gains on $34738 1 chiliad one thousand (38457-3719) inward assets. That is silent a respectable 13.2 percent.
My usual indices exhibit that this is indeed a real fine return:
| S&P 500 Total Return (incl. Dividends) | 15.1% |
| MSCI Global ex US | 8.4% |
| Barcap iShares 20+ Year Treasury Bonds | 4.7% |
| Barcap iShares 3-7 Year Treasury Bonds | 4.1% |
| Barcap iShares Short Treasury Bonds | 0.0% |
| Barcap Intermediate Investment Grade | 2.4% |
| iShares 10+ Year Investment Grade | 4.9% |
| SPDR Barclays High Yield Bonds | 2.3% |
| Ishares iBoxx Investment Grade Corporate Bonds | 4.1% |
However you lot could silent learn xx addition percent returns out of emerging markets during that time.
The 2011 returns for Ford are to a greater extent than modest. The usual table from the 10K shows $2887 1 chiliad one thousand inward gains on $39960 inward starting assets for the U.S. fund - a fairly minor 7.2 percent.
Here are the index returns for this year:
| 2011 | |
| S&P 500 Total Return (incl. Dividends) | 2.1% |
| MSCI Global ex US | -16.1% |
| Barcap iShares 20+ Year Treasury Bonds | 28.8% |
| Barcap iShares 3-7 Year Treasury Bonds | 6.4% |
| Barcap iShares Short Treasury Bonds | 0.0% |
| Barcap Intermediate Investment Grade | 1.9% |
| iShares 10+ Year Investment Grade | 11.4% |
| SPDR Barclays High Yield Bonds | -3.2% |
| PIMCO Investment Grade Corporate Bonds | 1.9% |
| Ishares iBoxx Investment Grade Corporate Bonds | 4.9% |
If you lot avoided global equities together with were long but about duration you lot did good that year. Pension funds are naturally long duration. That said Ford's functioning was inside the expected make (maybe calorie-free if you lot expected them to concur duration).
Summary
Gretchen Tai together with Hewlett Packard perform much better than you lot would await given the variety of their portfolio. Gretchen Tai genuinely is 1 of the neat undiscovered property managers.
I am looking frontwards to the filing of but about other Hewlett Packard shape 10K (due inside days) to uncovering out what Ms Tai has been upward to this year.
John
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