NEW YORK - Sanford C. Bernstein & Co. has allocated about 10% of its "strategic value" equity portfolios to U.S. Treasury bonds, with investor permission.
The allocation to bonds, used as an equity substitute, is based on Bernstein's view that the expected return on T-bonds is eclipsing that of some stocks.
Bernstein has about $20 billion in strategic value portfolios, which Bernstein President Roger Hertog describes as a systematic and quantitative large-cap value strategy. More than half the clients in the strategy allow the firm to use T-bonds, he said.
Bernstein isn't trying to call a market top or a downturn, but sees more value in bonds than it does in some of the value stocks it looks at, Mr. Hertog said. Bernstein executives first approached clients about adding T-bonds to portfolios about three years ago, when research showed the expected returns on T-bonds were becoming more attractive, he said.
"This is unusual to take such actions, it occurs infrequently," Mr. Hertog said. (The last time Bernstein used T-bonds as an equity substitute was in 1981. Mr. Hertog said at that time, the strategy worked very well.)
While Mr. Hertog acknowledges that bonds in the portfolio have underperformed stocks the last three years, he said Bernstein's strategic value strategy has outperformed its benchmarks, which is what clients want.
For the three years ended Dec. 31, Bernstein's strategic value composite returned 20.2% annualized, compared with the Standard & Poor's 500 Stock Index's return of 19.7%, and the S&P/BARRA Value Index return of 18.4%, he said.
At least one client terminated Bernstein over dissatisfaction with the strategy.
The University of St. Thomas, St. Paul, Minn., with $170 million in endowment and other assets, terminated Bernstein last year, said Carol Peterfeso, assistant treasurer. The firm ran $25 million and small-and large-cap value for the school. She said it seems Bernstein moved to T-bonds a little early.
And not all clients in the strategic value strategy agreed to let Bernstein make the switch, or were even approached.
Jay Fewel, senior investment officer, for the $24 billion Oregon Public Employes' Retirement System, Salem, said Oregon officials declined Bernstein's request in the latter part of 1996. While Oregon officials understood Bernstein's rationale for wanting to move some assets to T-bonds, Mr. Fewel said Bernstein hadn't been a manager for Oregon long enough - about two years -to allow it to make that kind of decision. Bernstein runs $500 million in large-cap value equities for Oregon.
Likewise, Bernstein approached executives for the $2.5 billion Hoechst Celanese Corp. pension fund, Somerville, N.J., in the early part of 1996, said Terry Denzer, director, investments and planning.
Fund officials refused Bernstein's request because they don't allow managers to invest in securities outside of the chosen mandate, Mr. Denzer said. He said, though, the firm has been approached by Bernstein executives several times about using international securities in the portfolio.