Why Did Railroads Lose Out to Trucks?

Web site development by:
New World Multimedia, Inc.

Why Did Railroads Lose out to Trucks?

There are probably many answers to this question, but most historians agree that a primary reason was that the railroad industry took much too long to realize that they were in the transportation business not simply the railroad business. Today, those of us in the Stable Value industry must continually challenge ourselves as to whether providing fixed income results with the absence of market volatility is enough, or whether the marketplace is ready for the use of even more complex investments in the search for higher stable returns within acceptable limits of risk.

Many years ago, most defined benefit plans had all of their assets invested in bonds and some cash equivalents because this approach was generally regarded as the prudent, conservative way to preserve pension assets.However, modern portfolio research revealed the fact that using multiple asset classes with low correlation to each other could actually result in eking out higher returns with the same or even lower risk than would be the case if all investments were concentrated in bonds. The "trumpet" chart on the next page indicates what the long term risk and return relationship is for each combination of assets from 100% bonds up to 100% stocks. Predictably, as the percentage of common stocks in each portfolio increases, the historic return increases. What is particularly intriguing is the fact that the portfolio risk, as measured by standard deviation, actually decreases when adding up to approximately 35% common stock, due to the absence of perfect correlation of results between stock and bond returns.

Peter Bowles

Peter E. Bowles, CEBS, President
Fiduciary Capital Management, Inc.

Robert P. Blanchard

Robert P. Blanchard, CFA
Assistant Director of Research
Fiduciary Capital Management, Inc.

The history illustrated by the "trumpet" chart suggests that a synthetic Stable Value portfolio consisting of approximately 35% stocks as well as bonds may not only have a higher return as expected, but also lower risk even before the smoothing effect of the book value wrapper. To see whether the long term capital market relationships held true in a more recent time frame, last fall we conducted a study spanning the thirty years ending December 31, 1996. This period incorporated much turmoil in both the stock and bond markets including the disastrous stock markets of '73-'74 in which the S&P 500 lost over 40% of its value, the late '70's and early '80's when long bonds lost value for over four years running, the fourth quarter of '87 when the S&P 500 lost over 22%, and in '94 when long bonds lost nearly 8%.