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Two articles that appeared last week in The Wall Street Journal symbolize, to my way of thinking, two obstacles that prevent the United States from getting back into solid growth mode. The first told about the California Public Employees’ Retirement System (CalPERS) reducing its investment target to 7.5% annually from 7.75%. The second revealed that blocs of Apple Inc. stock were being held by some surprising investment funds, including some focusing on dividends (until this week, Apple didn’t pay one) and others specializing in small and mid-sized stocks. The CalPERS move is good news, despite the fact that reducing the assumed rate of return means the state and its towns and cities must cough up $300 million more annually to fund the pensions. CalPERS trustees voted down a similar proposal last year because municipalities complained they could not afford the increased payments. This year, the trustees asked the fund’s staff to develop a phase-in approach to ease the blow. Pension plans have been using too-high return assumptions for years, partly to avoid the higher contributions that more realistic rates would require. The Journal article quoted Wilshire Associates as saying 8% is the median rate among state pension plans; Minnesota’s is 8.5%. Personally, I think 7% is more achievable. But the point is that clear, levelheaded, and honest thinking ought to prevail when setting return assumptions, not politics and short-term pain avoidance. We just endured a recession brought on, in part, by delusional housing prices and a wholesale failure of the due diligence process. If we repeat those mistakes our growth goals will be out of reach. The Apple situation shows that some fund managers have warped their integrity sufficiently to grab on to the stupendous price increase of that stock. Never mind that investors may have chosen those funds for dividend income or to gain exposure to small or mid-sized stocks. The dividend matter now goes away with Apple’s change in policy, but the small-stock issue doesn’t; Apple has the largest market value of any company on the planet. This is an open-and-shut case of ego over ethics, the kind of behavior that is a drag on any effort to accelerate growth. It will take sense and sensibility — on all levels — for the United States to achieve and sustain 4% annual economic growth. We need, as the kids used to say, to get real.
2012 Economic Growth Fellow
John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.Full Bio
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