The stock market's gyrations seem custom-made for self-proclaimed market guerrillas like the pension executives at Bethlehem Steel Corp., Bethlehem, Pa.
"We love that kind of market," said J. Gerard Mead, pension fund manager. Bethlehem internally manages about $1.4 billion in equities for its $5.6 billion fund.
"Sometimes the dot-coms are up, and sometimes the dot-coms are down," Mr. Mead said. "Sometimes the smokestacks are up, and sometimes they are down. That's the kind of market in which we do well. It gives us the price points in which to buy and sell.
"We only engage on our terms and when we want to. . . . It's the kind of market that we like."
Mr. Mead said despite the violent swings, "it's not clear that there has been a significant sea change yet."
Indeed, what's happening is a rolling correction in a number of industries, said Mike Hoben, president of Benefit Capital Management, which manages Union Carbide Corp.'s $4.2 billion defined benefit plan. There might never be a total market collapse, but tech stocks could tank, he said.
Benefit Capital, on behalf of Danbury, Conn.-based Union Carbide, has been underweighting technology holdings because of high valuations, said Mr. Hoben. It has been trimming positions in volatile tech holdings such as Selectron Corp. and Computer Associates International and buying them back when prices dropped. The profits have then been plowed into "more solid technology company names" such as IBM Corp. and Electronic Data Systems.
The profits have then been plowed into "more solid technology company names" such as IBM Corp. and Electronic Data Systems.
At the same time, investment professionals are attending more meetings and getting more questions from board members. "We assure them we're not in the dot-com companies, because we believe those are overvalued, although we do have a small position in America Online," he said.
Union Carbide also has been cutting back on financial stocks, because rising interest rates will make it difficult for them to do well.
Attractive sectors
While tech stocks have gotten overvalued, other sectors have become more attractive, Mr. Hoben said. He particularly favors household products; oil companies such as ExxonMobil Corp. and Texaco Inc.; and drug companies such as Pfizer Inc. and Eli Lilly & Co.
The $23 billion Tennessee Consolidated Retirement System, Nashville, has in the past several weeks reduced the technology weighting of its U.S. equities by 2.2 percentage points to 25.3% to take some profits, said Tom Milne, chief investment officer.
"We have five different equity portfolios managed internally, and this big divergence between the Dow and Nasdaq can create opportunities to shift the equity allocations around. So a couple of the managers lightened up in technology because those stocks got overvalued and it was a good opportunity to take some profits," he said.
The system owns more than 600 stocks, which reflect the entire market, so a 20% correction wouldn't hurt that much, he said. "It would take a 30% to 50% drop to really feel the pain," he said. "The big risk is if you lighten up too much on technology and those stocks soar, then you're ready to kill yourself."
For that reason, the system has been focusing more on stock selection than on sector bets.
But for every fund that's rethinking technology, there's another looking for buying opportunities in the sector.
The feeling at the $40 billion New Jersey Division of Investment, Trenton, is that the Nasdaq could plunge 10% to 15% at any time, but the system doesn't fret about short-term volatility, because it considers itself a long-term investor, said Maneck Kotwal, investment officer.
"If a good company sells off, we'll step in and buy," he said.
The system, which has 50% in U.S. equities and 15% in international equities, has focused on technology stocks since the mid-'90s.
"We were buying CMGI (an Internet holding company) in 1995, before anyone ever heard of it. We still own around $100 million of the stock," Mr. Kotwal said. "We have a diversified portfolio, but believe the Internet is here to stay and that it will produce a profound change in our economy."
The pension fund, which is managed internally, has a growth bias, but is sector-neutral. It has the same 30% weighting in technology as its benchmark.
Pension executives also are watching managers to make sure they aren't taking undue risks.
They "are looking at their managers to make sure they own what they are supposed to own. Among our clients, many are with `old economy' companies. They are looking at the valuations of old and new economy companies and saying: `How can xyz dot-com be valued higher than General Motors?' And being an old portfolio manager, I'd have to agree," said Howard Pohl, consultant with Becker, Burke Associates Inc., Chicago.
Not bursting yet
Most pension executives and consultants say they are moderating their expectations, but not anticipating a market collapse.
Tom Pipich, investment consultant with Buck Consultants, Pittsburgh, doesn't think recent events signal the end to the bull market. "I don't think the bubble has burst. It's really a tough call," he said.
Mr. Pipich said he would not be surprised to see a correction of up to 50% in "the more-aggressive end" of the small-cap and midcap market sectors. It wouldn't need to be a broad-based decline to adversely affect stocks in general, but the question is when. Now we are in the realm of guesswork, it could happen any time and extend over a six-month period."
The bifurcated market is temporary, said Mr. Pipich. "It only seems permanent because the momentum on the Nasdaq seems unstoppable. Sooner or later it will come back to earth, it's a question of when and what triggers it.
"My approach would be to say, `Stop wringing your hands and get some exposure to these (high-tech) companies, but respect the fact that we are at very high valuations.' It would be a mistake to be stubborn and believe that the bubble will burst and come back to normal. Some of these companies are doing amazing things and deserve these valuations."
The $25 billion internally managed Retirement Systems of Alabama, Montgomery, is dealing with technology by market-weighting it so it makes up 34% of its active large-cap funds benchmarked to the Standard & Poor's 500 index and 31% of its midcap funds benchmarked to the S&P 400.
Said Darren Schulz, acting chief investment officer: "We have stayed away from certain high-flying technology stocks such as the (business-to-business) commerce, and are focusing more on infrastructure and Internet service companies.
A hard call
"It's hard to support the rising technology prices, but at the same time it's also hard to make the call to underweight technology. We have held it at a market weighting for the last year."
Alabama has been writing call options on some technology stocks for six to nine months, Mr. Schulz said.
Union Carbide has considered putting collars or stop-loss orders on certain stocks, but hadn't as of mid-March. "I wouldn't want to make a market judgment during the economic boom. You could short a stock too soon," said Mr. Hoben.
Ronald Walter, executive vice president of Citigroup Investments Inc., concurred, saying that putting in protective measures now could mean losing a lot of upside if the market continues to rise.
But like other funds, Citigroup's is using a more cautious approach.
Citigroup reduced its total equity allocation to 50% from 55% in November, cutting U.S. equities to 37% of total assets from 42%, while keeping international equity at 13%. It pared allotments to U.S. core and growth managers that he wouldn't name. That money since has been invested in cash instruments, inflation-linked bonds and private equity. The pension fund now has a slight bias toward value investments and gradually has been reducing its technology exposure.
