The world’s biggest pension funds 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. The rest of the 10 largest kept them the same. UK pensions have cut stock allocations to the lowest since 1974, according to Citigroup Inc. Managers handling Oxford and Cambridge University professors’ assets have been selling shares as the MSCI World Index posted a five-month, 53 per cent rally.
“Given the storm in financial markets that we have seen, the name of the game is risk management,” said Dirk Popielas, head of the Pension Advisory Group at JPMorgan Chase & Co 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 Zurich-based Credit Suisse Group AG.
New century
Equities appreciated an average 12.91 per cent a year from 1900 to 1999, while bonds returned 4.69 per cent annually, according to the data from the London Business School and Credit Suisse. Since the start of the new century, bonds gained 6.36 per cent, compared with a loss of 2.27 per cent for shares.
Stock indexes retreated from London to Shanghai and Tokyo today as Japan’s economy grew less than economists estimated. The MSCI World slid 1.2 per cent at 8:48 a.m. in London, while futures on the Standard & Poor’s 500 Index sank 1.4 per cent.
The MSCI World’s 42 per cent slump last year decimated equity allocations at pensions. The largest funds oversee a total of about $3 trillion, magnifying the impact of their decisions on the performance of stocks worldwide.
Decade of ‘stagflation’
Equity assets in the UK fell to 41 per cent of holdings at the end of 2008, according to data compiled by New York-based 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 aren’t returning to their previous levels, according to Andy Maguire, a senior partner at Boston-based 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, annual data compiled by Citigroup show.
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 per cent in the same period, according to a June report from the US Census Bureau.
‘Right thing’
“The real issue is they don’t want the volatility they had,” said Louise Kay, 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. “Funds normally have to look whether they rebalance or not after one asset class loses value, and this time they are wondering whether this is the right thing to do.”
The FTSE 100 Index of UK stocks advanced 6.3 per cent this year through last week, the smallest gain among the world’s 20 biggest equity markets.
Four of the world’s seven largest pension funds — Sacramento, California-based California State Teachers’ Retirement System and California Public Employees’ Retirement System; Heerlen, Netherlands-based Stichting Pensioenfonds ABP; and South Korea’s National Pension Service — have cut their equity target allocations.
Calstrs, Calpers
The $119 billion California State Teachers’ Retirement System, which oversees the pensions of 833,000 members, said on July 21 that it had temporarily shifted 5 per cent from equities to fixed income, real estate and private equity, and permanently moved 5 per cent from stocks to “absolute return” products that target gains even as markets fall.
“The shift out of equities is still in progress,” Calstrs’ spokesman, Ricardo Duran, said in an e-mail on August 12. The value of the fund’s investments slid 25 per cent in the fiscal year ended in June.
The $181 billion California Public Employees’ Retirement System, which managed retirement benefits for 1.6 million current and retired public workers as of June 30, lowered its equities target to 49 per cent from 56 per cent on June 15.
Calpers lost 23.4 per cent in the fiscal year ended June 30, erasing six years of earnings.
