All public pension plans in the US should start reporting their returns on a monthly basis to improve transparency at their funds, say researchers at Markov Processes International (MPI).
Moving to monthly data reporting happens to be something the New Jersey-based investment researcher could help with. The company has built its business using returns-based techniques to evaluate whether financial disclosures at funds match up with their asset allocations.
“It’s a perfect due diligence—quick and precise due diligence—tool,” said Michael Markov, co-founder and chairman of MPI. “It doesn’t require a connection to a custodian.”
The analysis helps the firm measure what assets portfolios are exposed to, what risks a fund has taken, and whether the level of risk is appropriate for the fund. It could also help disclose some hidden fees and expenses, Markov said, that can help people “understand all the decisions” that go into investments.
“With the proper analysis, it gives a lot of transparency and then transparency can be understood in different ways,” Markov said.
MPI, which was founded in 1992, is known for its returns-based analysis, which is based on the investment research methodology designed by American economist and Nobel Memorial Prize winner Bill Sharpe.
MPI used that same analysis on Norges, the $1.3 trillion Norwegian sovereign wealth fund, to review how well its asset allocation linked up with its monthly public disclosures. After breaking down the fund’s allocation by asset class, then region, then factors, MPI discovered that the composition of the fund lined up with the fund’s financial disclosures.
Norges moved more toward equities, and away from bonds, over the course of more than two decades, MPI found. Within equities, the sovereign wealth fund also tilted more to European and developed markets over time. Those findings also line up with disclosures the fund has made to its stakeholders, helping it build a reputation for transparency, MPI said.
The same monthly returns analysis can help provide insight into public pension funds in the US that are less transparent, the researchers said. It’s a concern for a number of pension funds that have recently been swept up in transparency scandals in states such as Pennsylvania and California.
But skeptics disagree with the investment researchers. Some allocators argue that reporting returns on a monthly basis—as opposed to a quarterly or annual timeline—could encourage a short-term outlook on investments, when institutional investors operate over a longer time horizon. Many assets managed at public pension funds may underperform in the near term, but outperform as time wears on, they say.
For public pension funds that do need to improve transparency, critics say it’s far more important that allocators learn how to communicate their investment processes to their board trustees.
Understanding trustees’ risk tolerance, walking board members through the ins and outs of opaque investments, and setting expectations for performance are all more fundamentally needed to encourage transparency at pension funds than is more frequent reporting, allocators say.