From large to small, pension funds got hammered in the third quarter as global equity markets slumped.
A handful of U.S. pension funds showed little or no gains over the summer months. West Virginia Investment Management Board, which began investing in equities in February, posted a gain of 1.7% for the third quarter.
Most funds, however, posted losses due to falling U.S. and international domestic markets. Houston Firefighters' Relief & Retirement Fund, for example, took an 8% hit in the third quarter.
The quarter wiped out much of the equity gains over the year.
The Standard & Poor's 500 stock index dropped 10.3% over the quarter, and finished September at a level it hadn't closed at since the second week of February. And the Morgan Stanley Capital International Europe Australasia Far East index fared worse, plummeting almost 14.5% during the quarter and landing at a level it last touched in mid-January.
Pension funds -- for the most part -- won't review asset allocation based on one bad quarter, particularly since markets bounced back in October.
"We haven't seen the reaction from our clients" that they need to review their asset allocations, said Michael Beasley, managing director for San Francisco-based consultant Strategic Investments Solutions Inc.
"It's hard to tell where there is a pain level. And that pain level is different for everybody,"he said.
Pension funds most likely have only summary returns for the third quarter and soon will receive analysis from their consultants, he added.
Despite the poor returns, pension fund executives generally said they remain committed to their long-term asset allocations.
Between Feb. 2 and Sept. 30, the $4.7 billion West Virginia Investment Management Board, Charleston, saw its equities drop almost 6.9%. In the third quarter, equities returned -13.8%, said Craig Slaughter, executive director.
The fund so far has put between 17% and 18% of its total assets into the equity markets this year.
The pension fund, however, showed an overall positive return of 1.7% for the third quarter and gained almost 11% for the 12 months ending Sept. 30.
"We're long-term investors and made long-term asset allocation decisions. We're well aware that domestic markets were up to their limits, and it's better to be" invested in equities than not, Mr. Slaughter said.
Over the summer, he said, some state legislators made negative comments about the fund investing in international markets. Roughly, 4% to 5% of the fund is invested in international equities. The fund has no exposure to international bonds.
The fund also received "a couple of calls from citizens . . . basically opposed" to investing in equities, he said.
But the drop in markets might work to the fund's advantage in the long term, Mr. Slaughter said.
"A good bit of that buying occurred in the past month. It's fortuitous because markets are low, especially international" markets, he said.
The plan has a target of 55% of its asset allocation to equities, he said.
HAPPY BOND INVESTOR
The $18 billion South Carolina Retirement System, Columbia, is invested solely in bonds -- and was up close to 4.1% for the quarter.
The fund was "happy" about the falling markets, said John Pownall, deputy state treasurer. "I wish the correction had been more sustained."
The fund "doesn't own any stocks yet," but should close a contract with a consultant this week, he said. Its first equity investment will come in the opening months of next year.
One other pension fund saw the slump as an opportunity to buy equities.
The $43.2 billion State of Michigan Retirement System, Lansing, which is overseen by the Michigan Department of Treasury, had a total negative return of 5.3% for the quarter, but is up roughly 7% for the year ending Sept. 30, said Al Van Noord, director.
"We had a large cash position and took advantage of lower prices (of equities) and put cash to work," he said.
The fund bought $900 million in equities at the end of August and beginning of September, with $540 million going to in-house active management and the rest going to in-house passive management that mirrors the S&P 500, Mr. Van Noord said.
The money came from cash, he said. At the end of July, the fund's cash position had risen to 9.4% of its total; the fund is currently holding 5% in cash after its buying spree. It has also been buying investment-grade corporate bonds.
The $750 million Marin County Employees' Retirement Association, San Rafael, Calif., lost about $50 million in the third quarter, said Norman Klein, retirement administrator. Although the plan will not have its definitive third-quarter results until the middle of this month, Mr. Klein estimated the lion's share of the loss came from domestic equities.
Fund officials are not considering changing the domestic equities portfolios, he said, but they may switch global fixed income to active management from passive.
The third-quarter downturn forced the $3.6 billion pension fund of International Paper Co., Purchase, N.Y., to call a "special meeting" early last month of its investment committee, said Robert Hunkeler, vice president and director of investments.
"We outlined what had happened and what we were doing in reaction to that," he said.
Before the meeting, however, the company worked with its consultant, BARRA RogersCasey, "to analyze specific portfolios to see if we had any problems."
From that review, Mr. Hunkeler concluded that the general retreat from risk such as emerging markets -- rather than a design flaw -- caused the portfolios to underperform relative to their benchmarks. He declined to comment on specific numbers.
"We reconfirmed our commitment to our long-term strategy," said Mr. Hunkeler, who would say only that returns for the quarter were "down" and for the year to date, "flat."
The $10.7 billion Nevada Public Employees' Retirement System, Carson City, suffered an overall return of -1.6% for the quarter, said Laura Wallace, investment officer.
The year-to-date return as of Oct. 23, however, was a positive 7.6%.
The fund would not make any drastic changes after one bad quarter, she said.
Fiduciaries and trustees are "concerned and cautious," she said, but are "of the opinion that making significant changes in a long-term strategy is not in the best interest of the fund."
Domestic and international equities make up 32% and 8%, respectively, of the fund's asset allocation, which is "conservative" compared with other pension funds, Ms. Wallace said.
The fund's equity portfolio took the biggest hit, she said. Its U.S. equity portfolios declined 9% for the quarter, while its non-U.S. equity portfolios fell 16%.
Nevada PERS' fixed-income portfolios recorded gains of between 5% and 6% for the third quarter, she said.
STILL KEEN ON GLOBAL
The $1.4 billion Houston Firefighters' Relief & Retirement Fund lost approximately 8% in the third quarter and was down about 1% for the year to date through Sept. 30, said Danny Bowers, chief investment officer. Hits came from domestic and international equities, which fell 15% and 13%, respectively, along with a global high-yield bond portfolio that fell 15%, he said.
But the fall in global markets has not quashed Houston Firefighters' interest in global investing.
The fund allocates between 5% and 15% to "high-yield opportunities," Mr. Bowers said.
"We actually are putting more money into high-yield opportunities because the market is illiquid and bad pricing" makes a good opportunity to invest, he said.
In October, Houston Firefighters' gave its global bond manager, Loomis, Sayles & Co. LP, Boston, another $20 million from cash to invest in high-yield debt, Mr. Bowers said. Loomis, Sayles now manages $165 million -- about 12% of the fund -- in global bonds for Houston Firefighters.
The fund's guidelines call for between 5% and 15% to be in high-yield bonds, Mr. Bowers said.
The market downturn took an almost $6 billion bite out of the New York State Teachers' Retirement System, Albany, which saw the value of the fund drop approximately 7.6% in the third quarter, said Candice Ronesi, spokeswoman. The performance numbers for real estate and alternative investments have not been calculated for the quarter.
On June 30, the fund was worth $76.9 billion. By Sept. 30, it had fallen to close to $71.1 billion. The culprits were domestic and international equities, which fell 11% and 13.7% respectively, she said.
The $70 billion Teacher Retirement System of Texas, Austin, had negative returns for the third quarter of 5.3% but has a positive return of close to 8% for the 12 months ending Sept. 30, said Howard Goldman, spokesman.