As the stock market gallops along, some money managers and pension executives are softening their enthusiasm for stocks - at least temporarily.
Still, most believe the fundamentals remain for a continued bullish pace.
The torrid momentum of the domestic market advance this year has prompted some reflection and caution, but few are predicting a major downturn anytime soon. One consultant is suggesting a gradual move toward bonds while awaiting the next leg of the stock market advance.
Among some of the shifts under way:
Gary Brinson, president and chief executive officer at Brinson Partners Inc., Chicago, is looking to such areas as international bonds, where, he says, he can "get a bigger bang for the buck."
A Buck Investment Services managing principal has suggested a 40-60 stock/bond split and moving into investment-grade corporates while awaiting the next major move in stocks.
Despite the shifts, many institutional investors remain optimistic, even enthusiastic, about stocks. Most say any correction will be only a temporary setback on the way to new highs. They point to such positive signs as checked inflation, strong corporate earnings and interest rates headed lower.
"We remain constructive in our outlook for the domestic equity market. It may not be the right time to get too excited and start throwing a lot of money into the market, but we aren't lightening up (on stocks) either," said Margaret Homko, investment officer-equity at the $3.7 billion New Mexico Educational Retirement Board, Santa Fe.
Said Russ Flynn, director of pension fund investments at Chrysler Corp., Highland Park, Mich.: "You could argue that (stocks) are undervalued from an inflation standpoint. I see no correction in sight. We continue to monitor our positions on asset mix and classes within equities .... but there's nothing we want to change."
Of Chrysler's $12.4 billion in pension assets, 45% is in domestic equities and 15% is in European equities.
With the Standard & Poor's 500 Stock Index up 22.13% for the year through Aug. 30, some investors admit to a touch of anxiety while they stand firm.
Any "intellectually honest investor admits he doesn't know the future and tends to be nervous. We aren't nervous enough to do anything about it," said J. Parker Hall III, chief investment officer at Lincoln Capital Management Co., Chicago, with more than $6 billion in equities under management.
Mr. Hall said Lincoln's equity portfolios are fully invested. The market is fairly valued, he said, and he doesn't see any danger signals. "What we see are future returns on stocks roughly in line with normal long term trends of 8% to 9%," said Mr. Hall.
Only a few hint at caution.
Mr. Brinson of Brinson Partners said: "Valuations in the domestic markets don't look very attractive right now; it looks overvalued by about 15% to 18%. We are looking to other areas such as international bonds." Brinson has $43 billion under management, including $11 billion in U.S. equities.
John Breheny, managing principal at Buck Investment Services, Washington, has started recommending clients gradually move to 40% equities and 60% fixed income, reversing the traditional 60-40 equity-fixed income mix.
Mr. Breheny said he sees no compelling argument to suggest a 10% market correction, but he believes the "maximum upside for stocks from this point is around 5% over the next 12 months. That would be a pause by most people's definition."
Further out, Mr. Breheny said stocks look very good. "If you look at the market and earnings growth on a forward basis, this is a cheap market," he said.
Still, he is suggesting pension clients take some profits from the current market and buy investment-grade five- to six-year corporate bonds.
New Mexico Educational's Ms. Homko said she is "reasonably comfortable" with the board's $1.2 billion equity portfolio.
She said the outlook for stocks remains favorable "as long as the economy remains on track. But whether the market rises as sharply as it has during the past six months is far from certain."
She said she is "somewhat concerned" about committing new money to stocks, and is taking profits from certain stocks and redeploying the assets to other sectors of the market.
James R. Penner, chief investment officer at the Montana Board of Investments, said domestic equities are "fully priced." While board members are "very cautious," the fund will continue to expand its target allocation to 50% equities from about 35% now. "The market will dictate how quickly we get there," he said. The $2.75 billion board has about $1 billion of internally managed equities.
He remains bullish on stocks for the long term. "My expectation of where the economy is going over the next three to five years is very positive .....that's why I am comfortable expanding our equity exposure to 50%."
William F. Quinn, president of AMR Investment Services Inc., Fort Worth, Texas, said he has been "pleasantly surprised" by the stock market this year. He doesn't see signs of a pullback. AMR oversees the approximately $7 billion American Airlines Inc. pension fund, including about $4.5 billion in equities.
A correction is "always a possibility," but the market is "fairly valued" given the inflation and interest rate outlooks, Mr. Quinn said. "And if earnings continue to grow as expected ..... the market should continue to grow in line with it....."
As for a meaningful market correction, "I don't see it right now. I don't see anything for the next 12 to 18 months - maybe a breather but no significant correction."
Peter M. Stonberg, chief investment officer with State Street Global Advisors, Boston, which has about $10 billion in actively managed equities, said the firm has been underweighted in U.S. stocks for the past few quarters. He said the domestic market is going through a "pullback" and not a major turn. He said State Street plans asset allocation changes.
Reporter Patricia B. Limbacher contributed to this story.