Pension funds should report their performance on a monthly basis, says Markov

All public pension plans in the United States should begin reporting their returns on a monthly basis to improve transparency of their funds, say researchers from Markov Processes International (MPI).

Moving to monthly data reports is something the New Jersey-based investment researcher could help. The firm has developed its business using yield-based techniques to assess whether funds’ financial information matches their asset allocations.

“It’s a perfect due diligence tool, meaning fast and accurate due diligence,” said Michael Markov, co-founder and president of MPI. “It does not require a connection to a guardian.”

Analytics 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, which can help people “understand all the decisions” that go into investing.

“With proper analysis, it gives a lot of transparency, and transparency can be understood in different ways,” Markov said.

MPI, which was founded in 1992, is known for its return-based analysis, which is based on the investment research methodology devised by American economist and Nobel laureate Bill Sharpe.

MPI used this same analysis on Norges, Norway’s $1.3 trillion sovereign wealth fund, to examine how its asset allocation related to its monthly public disclosures. After breaking down the fund’s allocation by asset class, then by region, then by factors, MPI found that the fund’s composition matched the fund’s financial information.

Norges has shifted more toward equities and away from bonds, over more than two decades, MPI found. Within equities, the sovereign wealth fund has also shifted more towards European and developed markets over time. These findings also align with disclosures the fund has made to its stakeholders, helping it build a reputation for transparency, MPI said.

The same analysis of monthly returns can help better understand public pension funds in the United States that are less transparent, the researchers said. That’s a concern for a number of pension funds that have recently been swept up in transparency scandals in states like Pennsylvania and California.

But skeptics disagree with investment researchers. Some dispatchers say reporting returns on a monthly basis — as opposed to a quarterly or annual schedule — could encourage a short-term perspective on investments, when institutional investors operate over a longer time horizon. Many assets managed by public pension funds may underperform in the short term, but outperform over time, they say.

For public pension funds that need to improve transparency, critics say it’s far more important that fund adjusters learn how to communicate their investment processes to their trustees.

Understanding the risk tolerance of trustees, explaining to board members the ins and outs of opaque investments, and setting performance expectations are all more fundamentally necessary to encourage transparency in pension funds than more frequent, according to dispatchers.

Related stories:

Controversy still follows CalPERS CIO resignation

Why Brown Beats Other Ivies

Six Pennsylvania PSERS administrators call for firing of executive director, CIO

Tags: 401(k), Markov Processes International, MPI, pension, pension fund, plan, retirement