Six U.S. pension funds are rebalancing more than $7 billion in assets following the stock market's strong runup in the fourth quarter of 1999.
For many, rebalancing means taking money from the overweight growth equity portions of their portfolios and shifting into areas that haven't performed as well lately, such as value equity, fixed income and real estate.
Among pension funds:
* The $10.4 billion Kansas Public Employees' Retirement System reallocated $500 million from equities, both domestic and international, into fixed income, said Robert Woodard, chief investment officer.
* The $110 billion California State Teachers' Retirement System shifted $1 billion in assets from equity to fixed income to get back to strategic targets, according to CIO Patrick Mitchell.
* The $30 billion Massachusetts Pension Reserves Investment Management Board will reduce international equity exposure to 16% from 19% and move the assets into domestic fixed income, which is underweight because of last quarter's stock market runup, said Executive Director Scott Henderson.
* The $120 billion New York State Common Retirement Fund, Albany, will shift about $5 billion in domestic equity assets into international equities, real estate, fixed income and private equity, reported New York State Comptroller Carl McCall.
* The $5 billion Nebraska Investment Council, Lincoln, has shifted $200 million into domestic fixed income from domestic equity, said Rex W. Holsapple, state investment officer.
* The $687 million pension fund of Peoples Energy Corp., Chicago, shifted $76 million from short-term domestic fixed income and small-cap equity into intermediate-term domestic fixed income and other strategies.
Growth equities have been performing so well, it may be tempting to "let the U.S. equities run," said Jeff Nipp, head of investment research at Watson Wyatt Worldwide in Atlanta.
Less interest in timing
But by and large, most pension plans are rebalancing to their strategic allocations and investment policies.
"A few years ago we might have seen more sponsors who were trying hedge programs and various kinds of market timing strategies, but we're not seeing as much interest from plans sponsors in doing that," said Gloria Reeg, managing director at Frank Russell Co., Tacoma, Wash.
"It gratifies me that sponsors are looking at the disciplines and not trying to make judgment calls based on the recent past."
The recent past saw growth stocks dominate and many other areas, such as value, fixed income and real estate, lag. This wide performance gap has caused pension executives to shift assets from the overweight top performers to other areas to get back within their ranges.
The Topeka-based Kansas fund decided in January to shift some assets out of equities and into fixed income, which had been underweighted because of poor performance in the fixed-income market last year.
Mr. Woodard, the CIO, said assets were withdrawn fairly equally from equities of "every style and size," domestic and international.
Ruth Falck, consultant at Watson Wyatt Investment Consulting, Atlanta, said the majority of pension funds are rebalancing because their investment policies require it -- as Kansas' did.
That's the case at CalSTRS in Sacramento, too.
Mr. Mitchell said CalSTRS staff typically rebalances monthly, but December was not typical. As a matter of policy, assets must remain within 3% above or below target allocations. In December, the stock market moved so fast, he said, that the equity side of the fund hit its limit -- three percentage points above the target allocation -- quickly and cash flow was directed back toward strategic targets.
Regular rebalancing
In Columbus, the State Teachers' Retirement System of Ohio pension fund also regularly rebalances throughout the year, said Herbert L. Dyer, executive director.
Overall, the fund was up about 20% last year because of strong returns in international, and it was able to maintain its asset allocation throughout.
"Obviously, we would have been better off had we not been buying bonds with money we took off the common-stock table, but that's one of the prices you pay when all the markets are not moving simultaneously," he said.
The assets were shifted primarily into three areas; fixed income; alternative assets and real estate.
In Boston, PRIM is undertaking a rebalancing to "pare down some of the equity exposure and ratchet up some of the fixed-income exposure in light of what happened last quarter," said Mr. Henderson.
To bring the numbers back to within long-term targets, he said, the board probably will reduce international equity exposure three percentage points and move that into fixed income.
"Whatever we take off the table from equities, whether it's international or domestic, we'll put back into domestic fixed income, where we're underweight at present."
Wondering about the wisdom
Jay Kloepfer, director of capital market research at Callan Associates, San Francisco, said many pension funds are looking at the imbalances in the portfolios and dealing with them in the early part of the year.
"Toward the end of last year, you had people wondering about the wisdom of rebalancing at all," said Mr. Kloepfer, adding many fund executives were hesitant to take money away from their best-performing asset classes and managers.
"If you're in a trending market, rebalancing doesn't help you. If you're trending down, you're catching a falling knife; and if you're trending up, you keep taking money off the table."
However, he added, many pension executives see the importance of sticking to their strategic ranges.
"Most plan sponsors are sophisticated enough to understand the concept of buy low and sell high, which is what rebalancing is supposed to force you to do," said Mr. Kloepfer.
While value equity returns, like fixed income, have been relatively low compared to the growth universe, plan sponsors don't plan to change their overall allocations to value. A survey of plan sponsors conducted by Eager Manager Advisory Services, Louisville, Ky., in July found that, on average, there will be no significant increase or decrease of allocation to value equity in two years.
David Eager, managing partner, said the survey results demonstrate pension fund managers think returns will revert to the mean, "which is probably an appropriate strategy."
