Executives at a handful of pension funds and money management firms see investment opportunities in Operation Iraqi Freedom. But most are cautiously holding their ground.
Christopher Ailman, chief investment officer of the $94 billion California State Teachers' Retirement System, Sacramento, said stock market volatility resulting from the war "has represented a buying opportunity and allowed us to be more nimble."
CalSTRS' U.S. equity exposure, targeted at 38% to 44% of total assets, had dropped as the market tanked, so in-house portfolio managers have been buying to bring it back up. CalSTRS also leveraged its real estate portfolio, bringing in $750 million in cash that has been used to purchase equities.
William F. Quinn, president of AMR Investment Services Inc., Fort Worth, Texas, said the market's tumble at the beginning of the war "caused us to rebalance on a more frequent basis. As the markets go down, we buy more. We have a more disciplined approach to our rebalancing now." AMR Investment oversees the $11 billion American Airlines pension fund.
The $24 billion Retirement Systems of Alabama, Montgomery, stepped in around two weeks ago and bought around $200 million in equities in a Standard & Poor's 500 index strategy, said David Bronner, chief executive officer.
Also taking the war into account is the $315 million City of New Orleans Pension Fund. Jerry Davis, board chairman, is interested in searching for a long-short equity manager "so we can profit from the ups and downs in the market," he said, adding that he will discuss the idea with the rest of the board soon.
"I am very concerned about the potential for short (selling) managers to profit" during the war, Mr. Davis said. "I would like to find a long-short manager who could do this for us."
Some money managers said the war has provided new investment opportunities. Typical is Kevin Gaughan, portfolio manager and equity strategist at Strong Capital Management Inc., Menomonee Falls, Wis., who observed that the war has created an anxiety premium that has depressed stocks to a level playing field with bonds. That has inspired many institutions to look more favorably at equities.
"We're seeing shifts in asset allocation at many clients, who are moving 2% to 5% of assets out of fixed income and into equities," Mr. Gaughan said.
"A variety of plan sponsor clients are making these changes - both public and corporate pension funds as well as university endowments. Sponsors are making these moves while retail investors are scared to go into stocks now and are looking for the safety of bonds."
After visiting with several pension funds recently, Mr. Gaughan said, "Sponsors are looking for less exposure to indexed equities and more to active management, and they ... are desperately seeking fundamental original research. They are very turned off by Wall Street after all the corporate scandals."
He also sees an interest in growth equities. After value has outperformed, many contrarians are moving back toward growth, particularly all-cap growth strategies, according to Mr. Gaughan. One of Strong's specialties is all-cap growth.
`Now is the time'
Reiner M. Triltsch, CIO for international and global equities at WestAM (USA) Ltd., Dallas, believes the downturn in international markets provides good opportunities. "We've told clients that if you are thinking about giving us additional funds, now is the time to do it," said Mr. Triltsch, whose firm is a growth-at-a-reasonable price manager.
Jeffrey Diermeier, global chief investment officer, UBS Global Asset Management, Chicago, said the firm had been taking advantage of declining markets caused by the impending war to make "pair trades."
When the U.K. stock market plunged even more than U.S. markets, UBS portfolio managers cut back on U.S. holdings in banks, energy and health care, buying those industries in the United Kingdom because the stocks had become very cheap.
The firm also lightened up on its transportation bond holdings, as that sector rallied recently because of the war. Mr. Diermeier expects the transportation sector to do better than it has. Now that the price of oil has come down, he doubts shortages will be an issue.
Lara Rhame, senior economist and currency strategist at Brown Brothers Harriman, New York, recommends not making bets in either direction on the dollar. "It's hard to make currency bets now," she said. "If there are more POWs, the dollar goes down; if the war goes better, it's up." Over the long term, she expects the dollar to fall.
Other pension funds and money managers are being cautious. Many are holding their ground, deciding to wait until the war is over before considering any changes in their asset allocations and investments. And a number of pension fund officials said they see no reason to make changes to their allocations now.
Sticking with allocation
David Kushner, deputy director for investments at the $10 billion San Francisco City & County Employees' Retirement System, said, "We have a well-defined asset allocation and will stick with it. We're not making any changes in how or where we invest. We expect most of these events (such as the war in Iraq) to be short term. We believe in taking a solid, disciplined approach until there is a good reason to change it."
Herb Dyer, chief investment officer at the $41 billion State Teachers' Retirement System of Ohio, Columbus, said officials there had been anticipating for several months that there would be a war in the first quarter, so there was no reason to make changes. "We're comfortable where we are," he said.
George Saxon is chief investment officer-equities at DuPont Capital Management, which runs the $20.8 billion E.I. du Pont de Nemours & Co. Inc. pension fund, Wilmington, Del. He said: "We believe the basic economic environment and earnings environment are good and that spending decisions are on hold because of the war." DuPont is overweight equities about 4% to 5% for the pension fund and its outside client portfolios, Mr. Saxon said.
No long-term effects
Alan Brown, global CIO for State Street Global Advisors, Boston, said SSgA officials are telling clients "the war will most likely contribute to market volatility in the short term, but not have a big effect over the long term."
SSgA remains generally negative on the equity markets overall, because "we fear the downturn in consumer spending is not a short-term phenomenon, and we don't see orders or demand rising," said Mr. Brown.
David Bowers, global CIO for Merrill Lynch & Co. Inc., New York, said the war "raises the uncertainty and shortens people's investment time frames."
He's most concerned that the war "will have an impact on the rest of the world being willing to provide the U.S. with capital." America's account deficit is now at 5% of gross domestic product, while the budget deficit is already at 4% of GDP and could go to 5% because of the cost of the war and a possible tax cut, Mr. Bowers said.
"With all the uncertainty, we're counseling clients to hold the line on their asset allocation," said J. Bary Morgan, managing director at Baird Investment Management, Milwaukee.