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November 12, 2001 12:00 AM

REBALANCING ACT: $90 billion pension fund bonanza for stock markets

Equity underweighting prompts asset shift

Dave Kovaleski
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    U.S. pension funds are injecting more than $90 billion into the domestic and international stock markets in order to rebalance to their target equity allocation ranges, Pensions & Investments estimates.

    Among the moves:

    * California Public Employees' Retirement System, Sacramento, which pumped $3 billion into equities from fixed income since Sept. 11;

    * Florida State Board of Administration, Tallahassee, which put $1.7 billion into equities;

    * Washington State Investment Board, Olympia, $1.2 billion;

    * New York State Common Retirement Fund, Albany, $1 billion;

    * State of Michigan Bureau of Investment, Lansing, $900 million;

    * General Electric Co., Stamford, Conn., $900 million;

    * Alaska Permanent Fund Corp., Juneau, $800 million;

    * Indiana State Teachers' Retirement Fund, Indianapolis, $280 million;

    * Teachers' Retirement System of Oklahoma, Oklahoma City, $150 million;

    * Alaska State Pension Investment Board, Juneau, $150 million; and

    * Kansas Public Employees' Retirement System, Topeka, which put about $180 million into equities.

    In addition, the California State Teachers' Retirement System, Sacramento, and the State Teachers' Retirement System of Ohio, Columbus, have been rebalancing into equities since September. Officials at the two funds would not say how much they have pumped into stocks.

    Many pension funds have been underweight in stocks in the aftermath of the Sept. 11 kamikaze attacks on the World Trade Center and the Pentagon.

    A report by Goldman, Sachs & Co., New York, says pension funds were between 3% and 7% underweight in equities after the third quarter, depending on when they last rebalanced.

    Funds that rebalanced in August were about 3% underweight in equities due to market shifts, while those that last rebalanced following the second quarter were 6% underweight, according to Goldman. Pension funds that haven't rebalanced since Dec. 31, were 7.6% underweight.

    (To arrive at its estimate, P&I gathered Flow of Funds data that showed private and public pension funds had almost $3.2 trillion in stock as of June 30. Taking the most conservative underweighting figure (3%) from Goldman, P&I did the math and came up with the figure of more than $90 billion.)

    Missed targets

    Monica Butler, director of the U.S. consulting group at Frank Russell Co., Tacoma, Wash., said the third-quarter equity swoon knocked most Russell clients outside their target ranges. Since then, however, she said most clients have been rebalancing back into equity ranges, particularly those with policies that require them to rebalance as soon as allocations go outside their ranges.

    With the markets' uncertainty, "everybody's naturally a little bit nervous," said Ms. Butler.

    She said sponsors are rebalancing in part because it's a good equity buying opportunity, but also because they are sticking to their optimum asset allocations over the long term.

    "If you don't rebalance and the market does rebound, then you're going to miss that rebound," she said.

    Gary Bruebaker, chief investment officer of the $48 billion Washington State Investment Board, said officials there have moved $1.2 billion into equities from fixed income since mid-September. That's because its policy requires immediate rebalancing, he said, and fixed income was slightly high while stock was slightly low.

    Joanne Hill, analyst with Goldman Sachs, said pension fund rebalancing comes in waves. First were those plans that require shifts as soon as allocations get out of whack. Next were those that rebalance on a monthly or quarterly basis.

    Over the next two months, she said, rebalancing will continue among pension funds that employ strategic asset allocation policies.

    Alan Moore, chief investment officer of the $24.5 billion Alaska Permanent Fund, also shifted to stocks from fixed income. "If you're going to have a rebalancing policy, we think the best way to do it is to be as mechanical as possible," said Mr. Moore.

    Al van Noord, chief investment officer of the $56.6 billion State of Michigan pension fund, has rebalanced $900 million into equities since mid-September without a structured rebalancing policy. The shift came from cash reserves, where the portfolio had a two-percentage-point overweight at 7.2%.

    Staff shifted $300 million into equities the week after the terrorist attacks and have added $600 million more since.

    "We looked at it as an active trading strategy," said Mr. van Noord, citing low inflation, interest rate easing by the Federal Reserve Board, and other economic factors.

    Still, there are many pension executives who plan to sit tight for the next two months and see how the markets play out, said Jeff Schutes, senior consultant at William M. Mercer Investment Consulting, Atlanta.

    "It's not your traditional bottoming out of the equity market," where investors are confident that the market is going to immediately start working its way back up, Mr. Schutes said.

    "Over time the market will move back up, but there's so much uncertainty right now," he said, that many plan sponsors are hesitant about making a move over the next 30 to 90 days.

    The $88 billion GE pension fund moved $900 million to equities from fixed income in mid-September to move closer to target asset allocation ranges.

    Tim Benedict, GE spokesman, said the pension fund moved assets into equities because executives saw more reasonable valuations in the portfolio's core equity holdings.

    Brian Hersey, consultant with Watson Wyatt Worldwide, Atlanta, said it's a difficult time to think about moving money into equities, but over the long term, it makes sense.

    "Just as it was difficult to think about buying value and increasing allocations to value in late 1999, it's difficult now to think about putting money in growth or equities in general," said Mr. Hersey. But when the opportunity arises to buy good companies with "compellingly attractive valuations, that's the time to put money to work," he said.

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