The soaring stock market, though well into record territory, has inspired little or no pressure on managers from pension fund trustees and executives for reductions in equity exposures.
In fact, some managers report pressure from clients to stay fully invested and to not allow cash positions to increase.
The record-breaking surge in stocks seemingly has convinced even the most die-hard bears. There is barely a cautionary note being sounded in the pension investment community about a market top or correction anytime soon.
For the most part, pension funds and investment consultants are enjoying the ride; no one seems ready to head for the sidelines as most market indicators point to still higher returns for the market, at least through 1996.
After 1995's bloated 37.48% return for the Standard & Poor's 500 Stock Index, the stock market is being fueled by massive liquidity from mutual funds and 401(k) plans and is being bolstered by favorable economic conditions, low interest rates, low inflation and an accommodative Federal Reserve Board.
But some consultants, cutting through all the optimism, warn against letting greed stand in the way of a disciplined investment strategy.
"When you are dealing with billions of dollars you set long-term investment strategies, which are based on reasonable assumptions," said Ron Peyton, president of Callan Associates, San Francisco. "In this kind of market you tell clients to rebalance the portfolio if the rising market takes you beyond your target (equity) allocation.
"Each plan has a range (for stock allocations) and you should sell some stocks if you get beyond that and get back to your target," he said. "That's the only way I know to control risk. You don't try to time the market; you stay with your long-term strategy. That's the only way to buy low and sell high. If done correctly, running one of these funds should be one of the dullest things in the world."
Mr. Peyton said not everyone is heeding his advice to rebalance. He said only about half are actively involved in rebalancing, which means the other half are violating their asset allocation guidelines.
Mr. Peyton said tactical asset allocation managers were the worst performing equity group in the Callan universe for the five years ended Dec. 31, with an average return of 14.25% compared with 16.6% for the S&P 500. Small-capitalization managers, by contrast, were the best-performing equity managers for the same period, averaging 22.9%.
"That gives you some sense of what would happen if you tried to time the market," said Mr. Peyton.
Overall, pension fund managers appear poised for continued good news. Several said the bull market has stimulated a lot of conversation among their peers, supervisors and boards of trustees, but there has been no pressure to take profits or scale back on equity exposure in anticipation of a downturn.
Randall Kopsa, director-treasury division at the $650 million Boy Scouts of America pension fund, said he expects the stock market "will continue to be strong," noting the "complexion of the market has changed" from its retail orientation of just a few years ago to a more institutional-based one.
"These people have gone through the 1987 crash and understand volatility and have decided they will participate in the market. I don't think we will have a strong bull market but probably a more normal market with volatility by sector," he said. "People forget that there may sometimes be pain."
Mr. Kopsa said he would be surprised to see a major market correction soon, but a minor 8% to 10% temporary downturn could happen.
Mr. Kopsa said the fund has been rebalancing its portfolio since last year by allocating cash flow into fixed-income markets and has not had to sell stocks to stay within its target equity allocation. He declined to specify the equity allocation target, but said the fund is currently about 70% in equities.
Nathaniel Duffield, director-trust investments at Halliburton Co., Dallas, said the roaring stock market "makes me nervous. But I don't know what you do except sit back and enjoy it while it lasts. It certainly won't go on forever. We have an asset allocation strategy and we try to stick to that."
One concern, said Mr. Duffield, is a focus put almost entirely on returns while ignoring the risk associated with stocks.
"Rarely do I get questions about risk; there are a lot of people out there who haven't invested through a real bear market. But there is also a lot of money sloshing around in these 401(k) plans. It makes us nervous, but we stick to our allocation plan we have established and I don't see us making any changes."
The $1.6 billion Halliburton general investment fund is now 62% in equities. The company hasn't had to rebalance the equity portfolio yet because it is controlling its 60% to 64% stock allocation through cash flow.
Danny Bowers, chief investment officer for the $1 billion Houston Firemen's Relief & Retirement Fund, said he is both cautious and optimistic about the stock market.
Mr. Bowers believes the rally is "narrow-based," led by large industrial companies and "not a broad-based market expansion."
Market investors are expecting lower interest rates "which should keep the economy running smoothly for a time....But at the same time I expect weaker corporate earnings reports later this year. Lower rates can only sustain the rally for so long," he said.
He said the Houston fund has a defensive orientation by design and the "strategy we have in place should protect us on the downside."
The $450 million equity portfolio has a slight value bias, he said. The portfolio also has a "heavy energy exposure" which has a low correlation to the overall market.
Mr. Bowers said fund trustees have not voiced serious concerns about the equity exposure, "but part of our education process is that I keep the board informed that double-digit returns in the equity market are not the norm."
Terry Bilkey, principal at Yanni-Bilkey Investment Consulting, Pittsburgh, noted the current market psychology is "unbelievable."
"It's not just institutional people (driving the market), it's individuals, mutual funds, 401(k) plans - all of it. It's unbelievable what blinders people have on. You go in the market and make your 20% this year and then do it all over again next year. It's unbelievable," said Mr. Bilkey.
"It's just amazing how much positive news and optimism is out there right now," he said. "You would be surprised how little worry there is."
Mr. Bilkey said he is advising clients to rebalance and "not get greedy."
"Enjoy the ride but don't take any additional risks. Stick with your investment policy. If you are at the maximum allocation to stocks or over, take some back. It is tough to preach that gospel right now," he said.
Equity managers claim they are getting no undue pressure from pension clients to take profits and shift into cash. In fact, many equity managers claim there is growing pressure from pension funds to remain fully invested.
"Increasing numbers of plan sponsors have learned that cash is bad and are instructing us to be fully invested," said J. Parker Hall III, chief investment officer at Lincoln Capital Management. The Chicago firm has $37.7 billion under management, of which $11.5 billion is equities.
"Managers of sophisticated client pension funds have gotten the message that they don't want to go down when the market goes down but they don't want to give up much in an up market."
Larry Marks, managing director at Harbor Capital Management, Boston, which has about $4 billion in equities under management, said "there is reason to be concerned if the Dow is at 3000 or at 6000. If you are a professional, you run a little scared all the time - that's what we are paid to do."
Mr. Marks also noted many plan sponsors "don't want their managers to raise cash" and instruct them to remain fully invested. He said he has not had feedback from plan sponsors "indicating that they want to take any money off the table" in view of the toppy market.
"This market will go a lot higher than people think. The bears have thrown in the towel," he said.