Our newsletter for the week is live, and this time we’re looking at an interesting piece by Welton Investment Corporation, one of the bellwethers of the managed futures industry and a group Attain has a lot of respect for, especially when it comes to their excellent research work. As we said last time we highlighted their diversification research piece, “They say to get smarter… it helps to hang out with smart people. Well, in the investing world, the corollary may be: to be a better investor (smarter), read good investors’ (smart people’s) research work.”

In that light, we look forward to Welton’s periodic research pieces, and sunk our teeth right into their latest piece, titled “Pension Shortfall: Solving for the Missing 2%.” While the tone of the piece is a little more institutional (as in investors, not the negative connotation) as it gets into pension liabilities and whatnot – there was a gem of a chart in it which spoke volumes to us.

Welton’s article looks at whether pension funds will be able to meet the return target of 7.75% given various levels of investment in equities, fixed income, cash, and alternatives. Using the Grinold and Kroner method of modeling equity returns gave them an estimate of 7.39% return from equities, and a survey of corporate bond and treasury yields across various risk profiles and maturities provided an estimate of 3.25% return from fixed income investments. Assuming a 0.1% return from cash and a 61/36/3% split between equities, fixed income, and cash, they argue that pension funds not only need alternatives (and indeed, many have already begun incorporating alternative investments), but likely need a lot more alternatives. Naturally, this raised another question: how much will pension funds need to allocate to alternatives in order to achieve their target rate of return? Alternatively, given a certain allocation level in alternatives, what return would alternative investments need to generate to allow pension funds to reach their target return?

Answering this question produced a chart that, in our opinion, holds a master’s degree worth of information on just a single display, and inspired us to take the inquiry even further…

Source: Welton Investment Corporation Visual Insight Series: “Pension Shortfall: Solving for the Missing 2%”