What the PBGC Does with Its Portfolio

PBGC StrategyThe graphic comes from the Boston Globe with a tip o the cap to Rolfe Winkler from Option Armageddon. You can click on the chart for a better look. Rolfe did a write up on the PGBC’s prospects and it is a good albeit glum read. Here is something Barry published that is written by Jack McHugh that questions why the PBGC is even in the stock market, the Globe’s coverage and Randy Forsyth’s take.

For purposes of this blog I am more interested in what can be learned from the allocation.

What I like about the “New Target Allocation,” that we don’t often see with these types of funds, is the small allocations to the narrower market segments seen at the bottom of the chart.

Diversifiers are great in moderation but so many large pools of capital put huge weightings in commodities, absolute return or illiquid investments and that works most of the time but as we saw in 2008 when it did not work the results were budget altering.

The 22% now allocated to long term treasuries would seem to be a big red flag. If rates go up a lot then that part of the portfolio will drop precipitously in value and the income stream at that time would be way below the prevailing market–hopefully for the fund’s sake they realize this threat and are hedged one way or another.

It is interesting that 25% in is foreign equity (19% developed + 6% emerging) versus only 20% in domestic. The commitment to foreign equity makes sense to me but then it is difficult to reconcile there being almost no exposure to foreign debt. The TIPS exposure would obviously help mitigate some of the loss of purchasing power of the dollar if that seemingly inevitable consequence comes to pass but more exposure to foreign debt would also help in this regard.

Although not broken down in the graphic it would be interesting to see how they construct the equity portion of the portfolio. It is not clear from the nitty gritty that I was able to find whether the equity portions will be actively managed or indexed. It reads like active managers will be selected but it does say “index strategies will be considered.”

To the extent someone wanted to, the PBGC allocation is easily recreated with ETFs. While I would leave one or two things out I would, again, want some foreign sovereign debt. The biggest omission appears to be commodities and while not a glaring omission I am a huge believer in absolute return which also appears to be missing.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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