Pension Fund Investment Management: A Handbook for Sponsors and Their Advisors.

• Author: Lockwood, Deanna L.

As the assets of public pension plans have grown, they have increasingly attracted attention from politicians, regulatory agencies, investment professionals, the media and beneficiaries. The editors of this book observe that the days when the investment responsibilities could be given to a local banker have gone. Effective modern pension plan management requires sophisticated techniques founded on a solid theoretical basis.

This book is a collection of essays on trends and theories of investment management for pension plans. Administrators of public and private pension plans of all sizes will discover valuable insights. Even the articles nominally addressed to private plan concerns provide useful ideas and theories for public plan administrators. The editors Frank J. Fabozzi and Nick Mencher are widely published authors on investment, financial and pension fund issues. The contributing authors are primarily consultants in the investment field; however, three of the articles are written by plan sponsors. The collection is quite readable - only two of the essays are primarily mathematical in focus, but they do not require fluency in advanced mathematics. While primarily theoretical the writers are operating in the real world and offer practical suggestions for implementing the theories they propose.

Each of the essays discusses an aspect of investment management. These can be grouped into four main topics: investment risk, asset allocation, administration, and investment manager selection and evaluation. Obviously, these topics are interrelated, and a discussion of one necessarily involves the others. A common thread through all essays is the importance of understanding, measuring and managing risk.

In the essay "Managing the Asset Mix: Decisions and Consequences," Robet D. Arnott identifies four types of risk: portfolio volatility, volatility of the surplus (actuarial liabilities minus assets), long-term business risk and maverick risk. The latter is defined as the tolerance of the customer for deviation from the strategies and policies of other institutional investors. Any pension fund officer who has been a pioneer in some area will understand the importance of that risk factor. Arnott points out that a basic rule is not to exceed the customers' risk tolerance. Interestingly, he defines the customers not as the pension beneficiaries, but as the individuals who determine whether the investment officer keeps his or her job.

The essay, "How...