Dear Horst, think of a global pension plan

Dear Kohler,
I know you're busy. However, I was interested to read that the IMF's purpose of facilitating global financial integration, co-operation and employment, perhaps to reduce poverty, hasn't changed a great deal over the years, although your website says operations have evolved considerably.

So, not too silly to suggest a pension plan for the world? With globalisation leading to greater market correlation, it's also less silly to suggest that we run one fund for everyone. 40-odd trillion in equities, 30-odd trillion in bonds, half a trillion in hedge, and a couple of trillions in gold, our fund managers would have access to an exciting range.

To move this idea on, I asked different fund management persuasions for advice on asset allocation for the next quarter. They have been given a benchmark of over eight per cent per annum in dollar terms, as you seem to be linking this to everything. Why?

If we take the investors' nearly risk-free rate at, 4.05 per cent as a yield on the 10-year bond, one per cent for you as the provider, 0.5 per cent for me as the advisor, and one per cent for transactions, then we are going to need eight per cent a year for justification. We can always bring charges down if we sell this to the Chinese and Indian governments.

For the first insight, I asked Howard Smith, formerly of Morgan Stanley Quilters, who's team has migrated to First Capital Management. He is a generalist, with a balanced approach to planning, and starts off with a lecture: "Investment is for the long term and any advice given today will change over time." Fine, but what about Horst's plan?

"To beat the benchmark, cash yielding two per cent is not much use," says Smith, and works through other asset classes as follows: "Bonds are not too desirable either. This means we need to look at property and hedge funds for diversification. The problem with property is that returns don't come at a predictable rate.

"It is possible to buy property at a 30 per cent discount to its market value by careful selection of quoted property companies". This might not help us in the fourth quarter. "Hedge funds still have potential to provide the required return. The beauty of these funds is that they tend to close down (and repay investors) if the strategy doesn't work."

Concluding, Smith says, "For the last quarter we would de-emphasise equities (having been pro-equities over the year) to less than 40 per cent. Of that percentage, we would be pro Southeast Asian and Far East interests, and weighted against the US in expectation of dollar weakness. More neutral bonds at 10 per cent, ditto cash, the balance would be split between property and hedge funds."

For a second insight, I approached James Forster of Brewin Dolphin, who has been the most bullish of commentators from January (and credit where due, braver and more accurate, as of today, than most readable commentaries).

We should note though, his preferred management style is stock selection. Nevertheless, he remains convinced that bonds have no place in a fourth quarter portfolio. "Our view is that we are in a bull market, not a bull rally in a bear market".

A contentious statement, but you can't budge him. "The US is out of recession, and it is the world's biggest market, we would be placing some 60 per cent of an equity portfolio into the US." Contrary to Smith, Forster states "we are gung-ho bull, I can't understand any other view of the last quarter."

With such an aggressive approach, where would Horst go for a high-risk investment? To this question, Smith responded with a vote for a "specialist Japanese Fund, there is a change going on and investors know that the upside is nearly blue sky."

Forster concurs with Japan, but for him a higher risk play would focus on specific bio-tech, and technology companies, "use companies like Amgen (bio-tech), Intel and Texas Instruments, rather than anything I've never heard of," says Forster.

Just in case the equity play goes sour, I approached Pat Tuohy of Pioneer Alternative Investments whose All Weather Momentum Fund aims to provide absolute returns with minimum volatility. On a year-to-date basis, the fund had made 5.49 per cent and is on track to approximate its annualised return since 1995 of 9.35 per cent.

On this basis it meets our benchmark, and provides us with the probability of lower volatility (average 3.47 per cent, Sharpe Ratio 1.254). Over the same period the S&P 500 has averaged 9.91 per cent a year on performance, at a volatility of 16.83 per cent and a Sharpe Ratio of 0.292. The SSB Global Bond Index has averaged 5.56 per cent a year on performance, at a volatility of 6.36 per cent, and a Sharpe Ratio of 0.087.

The problem with this hedge fund is that you cannot box it into a "what's going to happen next quarter" question. Its main focus is in trying to match asset allocation to the present state of the economic cycle.

So, Tuohy steers me to his pie charts. "The state of the economic cycle is reflected in our asset allocation. The latest allocation shows a 30.8 per cent weighting into distressed securities, 20.8 per cent into global trading, 21.1 per cent into fixed income trading, and 12.4 per cent into equity market neutral. The rest is liberally spread around a range of alternative strategies."

So for last quarter hedge fund plays, it might actually be gold where Daris Delins of Castlestone Management, and Glen Owens of Rand Merchant Bank were prepared to see some merit in a short-term flutter.

If you need me to print off a few billion application forms, please let me know.

The author is the managing director of Mondial (Dubai) LLC