Teachers turns sour on stocks
Pension titan may sell up to $3B of holdings on fears
stocks may underperform for most of decade
Derek DeCloet and Sean Silcoff
Financial Post
One of
Canada's
largest
pension funds
is shrinking its
portfolio of
blue-chip North
American
stocks because
its managers
believe
equities will
produce dismal
returns for
most of the
decade.
The Ontario Teachers' Pension Plan is selling some of its
$10-billion of U.S. stock holdings and reducing its exposure
to large-cap Canadian firms because they are overvalued,
said Leo de Bever, senior vice-president of research and
economics of the $70-billion fund.
"What could happen is a situation like the 1970s, where
you had a poor return on equities for about eight years in
a row," he said.
Mr. de Bever said his thinking is based in part on Irrational
Exuberance, a book by Robert Shiller, an economics
professor at Yale University. Mr. Shiller presents evidence
that when price-to-earnings ratios are high -- as they are
now, by historical standards -- stocks perform poorly for
long periods.
Teachers' owned $41.4-billion in shares as of the end of
2001, representing 60% of the pension fund's assets.
Mr. de Bever said the pension fund's equity allocation
could drop as low as 55%, temporarily -- which would be a
decline of about $3-billion -- "mostly because we're pulling
out of the U.S. market."
About 15% of Teachers' assets were U.S. stocks as of
December 2001; Mr. de Bever said that could drop to
"something close to 10%" because "the U.S. market, to us,
looks the most overvalued."
The Standard & Poor's 500 composite index has dropped
30% since reaching a record high in March 2000. But the
index still trades at about 40 times earnings.
"It doesn't make a lot of sense to have a huge amount of
your assets in equities if the bond market is going to give
you equal returns," said Brian Gibson, Teachers' senior
vice-president of active equities. "The best case we can
come up with is equities might match bonds over the next
three to five to seven years. So why would you take the
risk?"
The pension fund will redeploy the money into several
other areas, said Mr. de Bever. It will probably increase its
investment in private companies, in infrastructure projects
and in emerging markets and Europe, he said.
Teachers' will also bolster its efforts in trying to actively
pick undervalued stocks, while reducing its exposure to
so-called "passive" portfolios that mimic major stock
indexes.
"The way we'll deal with that is we will either short
markets or specific stocks [that are expensive] and use
that money to buy cheap ones," said Mr. Gibson.
That will mean an increased focus on investing in smaller
companies. "The big caps are overvalued, the tech stocks
are overvalued. [But] we probably will be able to find
stocks underneath the index level that give us the right
risk-to-reward ratio," said Mr. de Bever.
Another large institutional investor said Teachers' is not
alone in pulling some money out of the market.
"I have heard from people who talk to a lot of buy side
investors that people don't have a lot of conviction in their
holdings these days," said the manager, speaking on
condition of anonymity.
"You have telecom and technology, which people are
steering clear of now. Then there are the safer consumer
stocks, like Loblaw, Molson and Canadian Tire. People
perceive those to be safe, but I think some people believe
the stocks are getting ahead of themselves. There's just
not a lot of places to put your money right now to feel
good about."
Teachers' pessimism is in contrast to the approach the
pension fund took last fall, when stock markets were
hitting new lows after the September terrorist attacks.
Then, it bought stocks and took advantage of an autumn
rally, which is one reason it showed only a small loss of
-2.3% last year.
The pension fund's top Canadian stock holdings, as of Dec.
31, were energy producer Nexen Inc. ($626-million), Royal
Bank of Canada and Nortel Networks Corp. (both almost
$500-million). In the United States, it is a significant
shareholder in Calpine Corp., Bank One Corp. and
Washington Mutual Inc., among others. |
