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Are Commodities the Kiss of Death for Teachers?

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Pension plans are looking to hop on the commodity bandwagon.

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Last week the Los Angeles Times reported the California teachers pension fund is $43 billion short.

Another pension alarm bell is ringing in Sacramento, this time at the teachers retirement system, where the nation's second-largest public pension fund is reporting a $43 billion shortfall.

The California State Teachers' Retirement System said that as of June 30, 2009, it could meet only an estimated 77% of its future pension obligations -- far less than the 100% recommended by actuaries.

Known as CalSTRS, the fund took a big hit during the 2008-09 fiscal year, losing a quarter of its value. Since then, its investment returns have improved, but the growth isn't strong enough to keep up with a widening funding gap.

What's worse, CalSTRS Chief Executive Jack Ehnes said in a report to be presented to the board Feb. 5, the fund could be broke in 35 years -- the length of a typical teaching career.

To avoid that calamity, Ehnes wants the state Legislature to raise employer pension contributions paid by the state and, indirectly, California's 1,043 school districts in the next few years.

Rolling the Dice With Commodities

Given there is virtually no chance the legislature will pony up $43 billion, CalSTRS considers rolling the dice on commodities. Hell why not? Taxpayers are on the hook if it doesn't work out.

Consider Bloomberg's California Teachers' Pension Fund Mulls Commodity Investment.

The California State Teachers' Retirement System, the second-biggest US public pension, is considering investments in commodities to boost returns and provide a hedge against inflation and slumping equities.

The governing board of the fund, with $134 billion under management, is scheduled to hear today a staff report in Sacramento that recommends its first-ever commodity investment. The board will decide whether to seek additional research on strategies and portfolio weightings.

"Commodities historically exhibited low correlation to equities and bonds and produced double-digit returns when equities fell," Innovation and Risk Director Steven Tong and Investment Officer Carrie Lo said in a report to the board. "In effect, commodities may act as an insurance policy, realizing low single-digit returns over the long run but generating large double-digit payoffs in the event of a negative shock."

Commodity prices have surged since 2001 as global economic growth led by China, the fastest-growing consumer of raw materials, spurred demand for metals, energy and grains. Copper prices have quadrupled in the past eight years, and crude oil has more than doubled. Higher prices have attracted increased interest from hedge-fund managers and pension funds.

Investors poured about $60 billion into commodities through index-tracking and exchange-traded funds and medium-term notes last year, and should add at least that much in 2010, according to a December survey of 250 investors by Barclays Capital.

Kiss Of Death?


Pension plans are looking to hop on the commodity bandwagon now after copper prices have quadrupled in the past eight years, and crude oil has more than doubled.

Is that a good thing?

Commodity prices have surged since 2001 as global economic growth led by China, the fastest-growing consumer of raw materials, spurred demand for metals, energy, and grains. Higher prices have attracted increased interest from hedge-fund managers and pension funds.

Is that a good thing?

$WTIC -- Light Crude


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China is on the verge of imploding (or blowing up attempting to prevent a implosion) yet pension plans and other misguided souls are plowing into China and commodities. These are contrarian indicators.
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No positions in stocks mentioned.
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