More than 90% of all large pension plans rebalanced last year, a Greenwich Associates survey shows, and a second round is already under way.
Greenwich, the Greenwich, Conn., consulting firm, found that 91% of pension plans with more than $1.5 billion in assets rebalanced in 2001. "As long-term investors, the game (for pension funds) is to stay with the program," said Rodger Smith, managing director. "The program was getting out of kilter; therefore, they had to take some action to get themselves back into balance."
Among the 9% of big funds that didn't rebalance is the $26.9 billion Colorado Public Employees' Retirement Association, Denver. At the end of 2001, Colorado's equity exposure was 65%, exactly the fund's minimum target allocation for domestic and international equities combined, said spokeswoman Katie Kaufmanis.
She added that an asset-liability study under way at Colorado PERA could result in some rebalancing.
According to Greenwich, a third of the funds that didn't rebalance last year don't have rebalancing policies. Others had wide ranges for their targets, or had stable portfolios despite the market turmoil.
Mr. Smith expects additional rebalancing this summer, sparked by the market drop in the second quarter. Goldman Sachs & Co. analyst Joanne Hill agrees that flows from asset allocators could stimulate the domestic equity market this summer, but she expects a lag before institutions start making the shift.
Some pension executives expect to move money back into equities as a result of their rebalancing policies. The Oregon Public Employees Retirement Fund expects to shift $1 billion to $2 billion into domestic equities this summer, said Michael Mueller, interim director of investments. Oregon follows a disciplined rebalancing policy under which money is shifted as soon as allocations fall out of target ranges. "The beauty of the policy is it takes all emotion out of the process," said Mr. Mueller. Right now, the pension fund has about 30% of its assets in domestic equities, about the bottom of its domestic equity range. He expects that to fall further if the markets continue their decline.
Jerry Mitchell, chief investment officer at Massachusetts Pension Reserves Investment Management Board, Boston, also expects to do some rebalancing this quarter as domestic equities are bordering on the bottom of their range. Mass PRIM also has an investment policy that calls for it to rebalance once allocations go outside target ranges.
At the $3.2 billion defined benefit plan of Georgia-Pacific Corp., Atlanta, John Stettler, vice president benefit investments, said: "We rebalance monthly. We have been selling more bonds and buying stocks. It's hard to know what you can do in this market besides that. You don't know when it's going to change, because once it does you can't get your equity allocation up fast enough if you don't rebalance on a regular basis. So we just have to grin and bear it, even though it's not the most enjoyable thing to be doing. I'd rather be in an up market. But I was around for the '73-'74 bear market and I lived through it."
When asked why they rebalance (fund execs were permitted to pick more than one answer), the Greenwich Associates study found 54% of pension plans do so because the markets moved them away from their target allocations.
About 50% rebalanced because of changes in their investment policies or objectives, with about one-third of that group rebalancing as a result of asset-liability studies. Just 5% rebalanced to change to lower risk profiles, and 5% rebalanced to change to higher risk profiles.
"It's not surprising so many funds rebalanced because they were moved away from their target allocation," said Mr. Smith. "But it is remarkable half of all funds rebalanced because of changes in their investment policy."
An unusually high number of pension funds revisited their investment policies in 2001, said Mr. Smith, and he expects more to do so this year.
The $41.9 billion Washington State Investment Board, Olympia, conducted an asset-liability study at the end of 2001, and as a result reduced its domestic equity allocation to 31% from 36%. It sold $1.6 billion in stocks earlier this year, said CIO Gary Bruebaker. On the flip side, the pension fund increased its allocations to real estate and private equity by a few points each.
The percentage of plan assets in domestic equities last year was 49.5%, the first time since 1996 that the allocation was below 50%, said Mr. Smith.
He expects that number to decrease further.