When the Federal Reserve cut a key lending rate by 25 basis points last week, global investors were left expecting -- and wanting -- more.
Fed Chairman Alan Greenspan had hinted at cuts in his September testimony before the Senate Banking Committee. But money managers and pension fund executives read the cut as confirmation that his attention had turned away from the threat of inflation to that of recession.
"Our view is we might see another rate cut at the next Fed meeting" in November, said Steven Kornrumpf, director for the $63.6 billion New Jersey Division of Investments, Trenton.
The cut in the overnight lending rate between banks, to 5.25% from 5.5%, had been discounted by U.S. and global markets, investors said.
The Federal Open Markets Committee, which sets policy for the Federal Reserve, said in a statement Sept. 29 that it made the cut to ease the effects of a global slowdown on the U.S. economy.
But further cuts could stave off a U.S. and global economic slowdown. The rate cuts could hold off a recession at home and ease the burden of debt overseas, money managers said.
Pension fund executives and money managers said they were long-term investors and had not positioned equity portfolios to react to interest rate cuts. Rather, the small slice by the Fed acknowledged that slowing growth and deflation -- not inflation -- are the developed and emerging markets' primary economic worries.
And U.S. and global markets reacted to fears of lower earnings last week. The Dow Jones industrial average dropped to 7632.53 by the close of trading Thursday from 8028.77 on Monday morning, a loss of 4.9%.
The Bloomberg Europe 500 index fell to 161.61 from 171.60 during the same period, for a loss of 5.8%.
But active international money managers said they had increased cash holdings as a defensive position in their portfolios during the past few months because of the same international markets turbulence that provoked the rate cut.
If not boosting markets, the Fed's move stabilized them, said Deborah Kuenstner, chief investment officer, international value equities, for Putnam Investments, Boston.
Had the open markets committee sliced 50 basis points off the overnight rate, it would have been required "to wait a lot longer to cut again," she said. She expects further cuts by the Fed by the year's end because of pressure on corporate profits, cutbacks in spending and a less-robust U.S. labor market, all of which will take inflationary pressure out of the economy.
Active managers routinely said their EAFE-style portfolios held the allowable maximum level of cash, with some recently doubling or tripling cash positions.
The Morgan Stanley Capital International Europe Australasia Far East index is currently weighted with Europe -- including the United Kingdom -- at 75%, Japan at 20%, and Australia and New Zealand making up 3% and 2%, respectively.
The New Jersey Division of Investments started 1998 with $1 billion in cash for investments and has increased its position to $3 billion, Mr. Kornrumpf said. The fund, which actively manages close to $8.16 billion in international equities, is looking for "an opportunity where money would be invested."
The fund lowered its exposure to U.S. equities to 60% from 68%, he added, shifting $2.6 billion into U.S. fixed income.
Putnam's cash position in its EAFE portfolios is 5%, up from its usual 1.5%, Ms. Kuenstner said. The position is defensive, with return on the cash in the low single digits, she said. Putnam actively manages $12 billion in EAFE-style accounts for institutional investors.
General Electric Investment Corp. typically manages 3% of its EAFE style portfolios in cash but carried between 3% and 5% in August and September, said Ralph Layman, executive vice president, international equities for GE Investments, Stamford, Conn. GE actively manages close to $10 billion in international equities.
The money manager's international equity portfolios are heavy in cash "only on a temporary basis," Mr. Layman said. "We typically manage accounts that are fully invested." The heavy cash position means the fund "is being tight on buying within our limits," or orders to buy stocks at a set price, he said.
BEA Asset Management has boosted its cash position in its global equity and EAFE portfolios to 10% from 2% at the end of July, said Ian Borsook, a New York-based strategist with BEA's global strategy group. That's the maximum cash position it allows in EAFE mandates from institutional investors, he said.
Further rate cuts would help the global economy, he said. But a recession in many Asian countries, along with Brazil's Oct. 4 presidential election and hope to get aid from the International Monetary Fund, weigh just as heavily on the hope for a global recovery, he said.
Bankers Trust is "holding a little more cash than usual" in its actively managed international equities portfolios, said Robert Reiner, managing director. It is usually about 3% to 4% in cash, he said. Currently that amount is closer to 7%.
Cutting interest rates further would lessen foreign debtors' interest payments, he said. Further cuts would be "the best tool to calm things down," he said.