The 554-point swan dive in domestic stocks in October started the stock market on a whipsaw ride of volatility that promises to continue into 1998; but pension plans and investment specialists aren't letting uncertainty scare them away from the market. They say they don't expect to change their asset allocations and investment strategies.
"I haven't made many changes," said Robert Maynard, chief investment officer at the $4 billion Idaho Public Employee Retirement System, Boise. "We have rebalanced at the margin to fixed income a little more than we might have otherwise, but it has been nothing major. Not even percentage points but more like one half of one percent (of total assets).
"We have no major changes in mind unless we have a prolonged period of negative returns. Baring that, we wouldn't expect anyone to start heading for the exit."
Mr. Maynard said he agrees with the consensus that domestic stocks will remain volatile heading into 1998 but has seen no evidence suggesting that equity allocations should be reduced.
Even with the newfound volatility, stocks have outpaced fixed income investments, he said, requiring more frequent rebalancing.
"Volatility will probably be with us for a while, certainly for the next couple of quarters," he said, but long-term outlook for equities remains favorable.
Normal returns expected
Some market strategists say the three-year runup in the domestic stock market still has some steam left, but the going will be rough and returns probably won't match the 20%-plus returns of the past three years. Industry sources forecast 1998 stock market returns will revert to more normal single digits, even though the economy continues to hum along. Inflation is low and interest rates are testing late 1995 lows of just under 6% on the 30-year treasury bond.
Optimism could be hampered by the flood of bad news about economic problems in Asia and what some consider excessive equity market valuations, but pension plans are expected to stick with their asset allocations and plan no cutbacks in equity exposure.
"How bearish can you get with the long government bond at 5.89%?" asked Jonathan Muehl, consultant with Buck Consultants, Pittsburgh.
Mr. Muehl said he has seen increased interest among some plan sponsors in high-yield fixed income instruments "for those clients who have no exposure." The attention to high-yield bonds "suggests for some that (high returns experienced in) traditional markets, such as the runup in the S&P 500, can't be expected to continue.
"We haven't seen plans turning away from using index funds, but I think people are getting a little more open now to more diversification from the standard large-cap U.S. equities."
But with low inflation, low interest rates and a strong economy, it would cut against the grain to predict a bear market in stocks despite concern about market conditions in Asia and "concern about how long the good news can continue" for domestic stocks, he said. The firm forecasts a total return of 9% for the S&P 500 in 1998.
Funds staying put
Gerard Mead, pension fund manager at Bethlehem Steel Corp., Bethlehem, Pa., said he has made no asset allocation or investment objective modifications heading into 1998 even though market volatility appears to have become a more prominent part of the investment landscape. Bethlehem Steel has about $5 billion in pension plan assets and about 60% of its assets are invested in equities.
"Our expectations for 1998 would be less than in the last few years. Our portfolio is performing well and we haven't taken any extraordinary measures," he said.
Tom Beavers, executive director of the $4.6 billion Oklahoma Teachers Retirement System, Oklahoma City, said he remains optimistic about the outlook for domestic stocks "but things will be a lot tougher in the new year.
"We're certainly not planning to cut back our equity position. We are working towards an allocation of 65% (equities) and we will stay with that."
Ernie Ankrim, director of portfolio research at Frank Russell Co., Tacoma, Wash., said pension plans shouldn't change asset allocations based simply on the expectation of continued market volatility. In general, he said, plans should not adjust allocations "in the absence of some reliable insight."
Mr. Ankrim, who has researched the costs of attempting to time the market, said sophisticated professional investors cannot expect to add value through tactical adjustments to their investment strategies. Pension plans may change asset allocations or strategies if risk tolerance has changed, but not because of a change in expectations for any particular asset class, he said.