Inflation never sleeps -g-
Adding to Woes of U.S. Stocks,
Pension Funds Are Pulling Back
By CRAIG KARMIN
November 27, 2007; Page C1
As the U.S. stock market struggles, it is facing another head wind: Some of the nation's most powerful investors are unloading shares in a big way.
Several of the largest public pension funds have been selling billions of dollars held in U.S. stocks, and others are expected to join in. In most cases these actions are unrelated to the recent market jitters, though worries about the economy, the weakening dollar and the credit crisis could be accelerating these moves. More broadly, they are part of a long-term plan to reduce stock holdings in U.S. companies to help fund other investments.
Among the funds that are part of this trend: the New York State Teachers' Retirement System, the New York State Common Retirement Fund, the Teacher Retirement System of Texas and the Florida Retirement System Pension Plan. Collectively, these plans control more than $500 billion in assets.
Recently, the nation's largest public pension fund indicated that it may soon join them. Russell Read, chief investment officer for the California Public Employees' Retirement System, or Calpers, said at a board meeting last week that the $250 billion fund could enhance returns by moving assets to foreign from U.S. stocks.
One plan calls for Calpers to reduce its U.S. stock position to 24%, from 40% of its portfolio, which would represent the fund's lowest allocation to U.S. stocks in more than 20 years. Calpers' board will consider the measure next month.
While some public pension funds are bucking the trend by keeping their U.S. stock holdings steady, industry consultants said the clear majority -- many still wary of the stock market selloff at the start of this decade -- are cutting back. "This is a long-term systemic trend," said Cynthia Steer, chief research strategist at Rogerscasey, a Darien, Conn., consulting firm. "It isn't going to turn around soon."
In some cases, pension funds are increasing their holdings in overseas stocks to take advantage of opportunities abroad. In others, money is going to hedge funds, private equity or real estate to help diversify a portfolio with investments that don't usually move in lock step with stocks or bonds. Corporate and some public pension funds also are selling stocks to add long-maturity bonds to move their holdings more in line with long-term payout liabilities.
These moves can take months or years to complete and are only beginning to show up in figures. But such a trend is a potentially significant blow to the stock market, which in past decades could count on large public funds as reliable buyers through good and bad times. That support from pension funds is waning, Ms. Steer said.
The more sophisticated money managers at endowments devote only about 15% to 25% of their assets to domestic stocks, compared with 35% to 50% at large public pension funds, Ms. Steer said. But over the next few years, she expects the figure for pension funds to drift lower, with the more aggressive ones placing only 25% of their investments in U.S. stocks. Even the conservative funds, she said, eventually will have less than half of total assets in U.S. stocks.
For most public funds, foreign stocks were considered exotic until a decade or so ago. Although the more progressive funds dabbled in private equity or real estate, the majority of public funds hewed to the traditional U.S. stock and bond investments.
The stock market rally in the late 1990s attracted more pension-fund money, with many raising their holdings in U.S. shares. But the collapse in technology stocks that spilled over to the broader market caused many pension funds to reconsider their positions in the market.
"The volatility of domestic equities is something we've been trying to mitigate," said Jim Fuchs, spokesman for the New York State Common Retirement Fund, which has $155 billion in assets. The fund had 50% of its portfolio in U.S. stocks at the end of its fiscal year in March 2005. But two years later, after laws governing the fund were changed to give it more flexibility to invest, that stock position was down to 42%, and could fall further.
Other pension funds are only now starting to cut back on the U.S. market. The Teacher Retirement System of Texas holds a $56.7 billion position in U.S. stocks. It plans to halve that position over the next two to four years so U.S. stocks will fall to just 25% of the portfolio. The change is part of a broader strategy to move money into private equity, hedge funds and other investments.
"It is a much better balanced strategy," said Britt Harris, the new chief investment officer behind the decision. The new mix, he said, "will achieve greater diversification as well as improve long-term potential to earn high long-term returns."
The New York State Teachers' Retirement System, with $100 billion in assets, also disclosed plans to cut its target rate for U.S. stocks to 46% from 51%. The move will enable the fund to increase its investments in foreign stocks to 15% of assets from 10%.
In Florida, the Retirement System Pension Plan examined the potential returns, relative to perceived risk, for U.S. stocks versus other investments. The $136 billion pension fund decided to cut its target for domestic stocks to 38%, from 48% in 2003, during the previous investment revision. At the same time, the fund raised its targets for foreign stocks, bonds and private equity. "Our risk-return expectations have shifted," a spokesman said.
Write to Craig Karmin at craig.karmin@wsj.com |
