Pension fund leaders turning backs on stocks
August 18, 2009
By Alexis Xydias and Adam Haigh
The world's biggest pension funds have lost confidence in stocks as the best long-term investment, cutting holdings or leaving them unchanged during the steepest rally since the 1930s.
Funds overseeing money for California teachers and public workers, Dutch government retirees and South Korean private sector employees reduced their target weightings for equities this year, according to data compiled by Bloomberg. The rest of the 10 largest kept them the same.
UK pensions have cut stock allocations to the lowest since 1974, according to Citigroup.
Managers handling Oxford and Cambridge University professors' assets have been selling shares as the Morgan Stanley Capital International (MSCI) world index posted a five-month, 53 percent rally.
"Given the storm in financial markets that we have seen, the name of the game is risk management," said Dirk Popielas, the head of the pension advisory group at JPMorgan Chase in Frankfurt. "The majority of pension funds have not finished taking risk off their portfolios. Some have not even started."
Losses suffered in the worst decade for stocks versus bonds since at least 1900 drove pension funds to pour more money into fixed income, commodities and derivatives just as signs the global recession is easing helped equities rebound from the MSCI World's biggest annual drop on record.
The average return for US stocks has trailed government bonds by about 8.6 percentage points annually since 1999, after outperforming by 8.2 points last century, based on data compiled by the London Business School and Credit Suisse Group.
Equities appreciated an average 12.91 percent a year from 1900 to 1999, while bonds returned 4.69 percent annually, according to the data. Since the start of the new century, bonds have gained 6.36 percent, compared with a loss of 2.27 percent for shares.
Stock indices retreated from London to Shanghai and Tokyo yesterday as Japan's economy grew less than economists had estimated.
The MSCI World's 42 percent slump last year decimated equity allocations by pensions. The largest funds oversee a total of about $3 trillion (R24 trillion), according to data compiled by Bloomberg, magnifying the impact of their decisions on the performance of stocks worldwide.
Equity assets in the UK fell to 41 percent of holdings at the end of 2008, according to data compiled by Citigroup.
The last time British pension funds held so little in equities was in 1974, after the Middle East oil embargo ushered in a decade of stagnant growth and price increases known as stagflation.
Funds are not returning to their previous levels, according to Andy Maguire, a senior partner at Boston Consulting Group.
The proportion of equities in UK pensions exceeded bonds by 1.6 percentage points in the first quarter, the smallest gap since 1962, according to annual data compiled by Citigroup.
Equity losses have hit the pension industry just as liabilities increase. The number of people worldwide 65 and older may jump to 1.3 billion by 2040 from 506 million last year. Their proportion of the total population will double to 14 percent in the same period, according to a June report from the US Census Bureau.
"The real issue is they don't want the volatility they had," said Louise Kay, the head of UK institutional business development at Standard Life Investments in Edinburgh, which oversaw the equivalent of $34 billion for UK pension firms as of December.
The FTSE 100 index of UK stocks advanced 6.3 percent this year until last week, the smallest gain among the world's 20 biggest equity markets, according to data compiled by Bloomberg.
Four of the world's seven largest pension funds - the California State Teachers' Retirement System (CalSTRS), the California Public Employees' Retirement System (Calpers), Netherlands-based Stichting Pensioenfonds and South Korea's National Pension Service - have cut their equity target allocations, according to Bloomberg data.
The $119bn CalSTRS, which oversees the pensions of 833 000 members, said on July 21 that it had temporarily shifted 5 percent from equities to fixed income, real estate and private equity, and permanently moved 5 percent from stocks to "absolute return" products that target gains even as markets fall.
The value of the fund's investments slid 25 percent in the fiscal year ended in June.
The $181bn Calpers, which managed retirement benefits for 1.6 million current and retired public workers as of June 30, lowered its equities target to 49 percent from 56 percent on June 15. Calpers lost 23.4 percent in the fiscal year to June, erasing six years of earnings.
ABP, which oversees the equivalent of $256bn for more than 2.7 million Dutch government workers and teachers, reduced stock holdings to 29 percent from 32 percent in the first months of this year to reduce risks, according to spokesman Thijs Steger. ABP, the euro region's biggest pension fund, said the value of investments had increased 4.5 percent in the first half.
The Dutch pension fund is turning to so-called alternative investments to boost returns. It outbid music publishers in April for the works of Richard Rodgers and Oscar Hammerstein II, including The Sound of Music and Oklahoma!
South Korea's National Pension Service cut its 2009 domestic stocks allocation in June for the second time in a year as it predicted a "slow" economic rebound.
The fund posted a 0.2 percent loss on assets in 2008, according to South Korea's ministry for health, welfare and family affairs, even as the country's benchmark Kospi Index of stocks slid 41 percent.
Norway's sovereign wealth fund, which invests the country's oil money abroad to avoid stoking domestic inflation, has been a buyer of stocks this year even as its target allocation held steady.
The Universities Superannuation Scheme, which oversees the pensions of employees at more than 400 universities and higher education institutions including Oxford and Cambridge, was shunning stocks, said Elizabeth Fernando, an adviser to the fund's investment committee. - Bloomberg
|
|
