Multi-Asset Class Investment Strategy [Hardcover]

I bought this book after reading a favourable review in a pension journal, but there is so much that is wrong in it that I wish I hadn't bothered.
The author starts by criticising the technique of discounting liabilities to calculate their present value. His objection boils down to the fact that this is often done at the gilt yield, which he wrongly says is what the accountancy standard requires for recording pension costs in sponsors' accounts. His conclusion is that trustees need to know the internal rate of return that will equate the present fund and future liability cash flows, increased by 10 to 25 per cent to allow for uncertainty.
Then he throws out the IRR and substitutes his own formulation of "total fund return". This is last year's excess of expenditure over contributions, increased by allowances for the change in the ratio of the number of pensioners to the number of contributors, the reduction in the average term to retirement, improved longevity, pension accrual, and inflation. He does not say how these allowances are calculated or what you do if income exceeds expenditure. This whole idea is flawed, and shows that the author has scant experience of pension funding.
Having worked out what return the fund "needs", he chooses the asset allocation with an expected return that equals this. He overlooks the fact that the expected return is not what will actually happen, but just the mid point of a range of possible outcomes, and that the chosen asset allocation is more than likely not to achieve the return that you need.
In five places he likens pension fund investment to travelling by train, saying that it doesn't matter how fast or slowly the train goes as long as it gets to your destination on time. In the real world, how you get on in the long term is the sum of how you get on in short-term intervals, and it does matter if your train comes to a long stop in the middle of nowhere. The comparison is not helpful because trains can be late but are never very early, whereas investment returns can be much worse or much better than you were expecting. It is this probabilistic nature of investment that the author does not understand.
He castigates the Yale Endowment fund managers for using their subjective judgements of the distributions of future returns, instead of assuming that they will be the same as they have been in the past. He criticises the use of the word "risk" when what is meant is "volatility", but continues to use it. He vilifies the Capital Asset Pricing Model, because it uses the covariance of an asset class return with the return of whole market of which it is a constituent. And he gets normalised variables mixed up with probabilities. It's no wonder the publisher's blurb says that his approach is "unique"!
The whole book is peppered with annoying, irrelevant asides. I don't believe for one second that Albanian has 27 words for moustache, but if it were true I wouldn't want to be told this in an investment book.
The general idea that trustees should invest entirely in high-return assets with low correlations is a good one. But if you want to read about it then David Swensen's "Pioneering Portfolio Management" is an infinitely better book than this one.

I was disappointed with this book, having read the uniformly positive reviews here. The back cover blurb hints at some startling insights into the Yale investment model; in practice, the author is unable to offer any more insight than could be gleaned by anyone from reading a few of Yale's annual reports.

The lack of a sound statistical base undermines much of the contents of the book. The author seems to have no knowledge of skew distributions, tail dependencies and multi-year Monte Carlo modelling, all of which must surely be central to the real Yale model. Further, he has a poor grasp of the issues regarding the validity of some of the indices he is using (notably that for hedge funds) and gives far too much credibility to his very limited historical data.

The book is also weak on reconciling the theory presented by the author with the practical issues of pension fund investment. Subjects such as accounting for pensions under IFRS and the employer's covenant are either skimmed over or ignored altogether.

Its redeeming features include a decent rebuttal of the liability driven investment mantra and strong sections on property and (particularly) private equity. Also, any book that challenges pension fund trustees to think outside the box has to be commended.

I am involved with the pension process, though I would prefer not to say in what capacity, and managed to get my hands on an early copy of this book. It is a real eye-opener and I can honestly say that it has caused me to question much of my thinking and decision-making in the past. There can be no doubt that, as the author says, we are sailing into a new world of investment, and this book will help you navigate those uncharted waters.