Executives at many pension funds are expected to review their strategic asset allocations, rather than rebalance, in conjunction with anticipated plan sponsor contributions of almost $100 billion this year.
Joanne Hill, managing director at Goldman, Sachs & Co., New York, estimates about 50% of large corporate pension funds are conducting asset allocation reviews with an eye toward reducing risk as well as investing in alternative asset classes, actively managed portfolios and absolute return strategies.
"Some of the plans that were aggressively rebalancing last year are holding back this year," said Ms. Hill. For many, this would be the third year they've had to buy equities after rebalancing to target levels, and they just don't want to do so.
"In cases where the companies are not healthy, they cannot bear another equity market decline," said Ms. Hill.
High on list
A recent survey by J.P Morgan Fleming Asset Management, New York, also shows that asset allocation reviews are high on pension funds' to-do lists. The survey found that nearly a third of 80 corporate and public defined benefit plan sponsors are changing their asset allocations to reduce risk, while another 40% are considering changes.
And Barton Biggs, chief global strategist at Morgan Stanley, New York, recently wrote that 12 of the 14 large pensions and endowments he has visited in recent weeks were below target ranges in domestic equities - but weren't planning to rebalance.
"They have suspended rebalancing because the chief investment officer or next highest authority is bearish," Mr. Biggs wrote in a commentary. He wasn't available for further comment.
The $54 billion General Electric Co. pension plan is among the large funds reviewing their asset allocations. Tim Benedict, spokesman for the Stamford, Conn.-based plan, said the target asset allocation was changed this year to reflect the plan's actual allocation. Equities, including private equity, dropped to 65% of assets from 71%; fixed income rose to 24% from 15%; and alternatives (including real estate, hedge funds, and cash) dropped to 11% from 14%.
The Massachusetts Pension Reserves Investment Management Board, Boston, which manages the state's $25 billion pension fund, is reviewing its long-term asset allocation, said Jerry Mitchell, chief investment officer.
"We're taking a fresh look at everything," said Mr. Mitchell. PRIM officials are reviewing existing asset classes, looking into new alternative asset classes and reviewing active-passive ratios. "It will either take us in new directions or validate where we are today," he said. The plan has not rebalanced because all of its asset classes are within target ranges, he said.
A number of other plans are embarking on similar reviews: the $20.3 billion Pennsylvania State Employees' Retirement System, Harrisburg; $6.5 billion Ohio School Employees' Retirement System, Columbus; $17.2 billion Arizona State Retirement System, Phoenix; $4 billion Orange County Employees Retirement System, Santa Ana, Calif.; $1.7 billion Baltimore Fire & Police Employees' Retirement System, Baltimore; $1.2 billion Minneapolis Employees' Retirement Fund; $5.2 billion Georgia-Pacific Corp., Atlanta; and $250 million Louisiana State Police Retirement System, Baton Rouge.
Some pension funds are still being rebalanced.
The $8.1 billion Kansas Public Employees' Retirement System, Topeka, rebalances monthly, said Robert Woodard, chief investment officer.
Louis Finney, investment consultant at Mercer Investment Consulting Inc., Chicago, said pension plans are both rebalancing and reviewing asset allocations. "Some are gulping when they have to buy more equities," said Mr. Finney, but they are adhering to their policies.
One of two camps
Karen McQuiston, head of the strategic investment advisory group at J.P Morgan, said pension plans that are doing asset allocation studies fall into one of two camps: They're looking to reduce risk or boost returns. "There are some who are saying, `I've felt all the pain I can stand and I can't take it any more,"' said Ms. McQuiston, "and there are some who are facing a higher growth hurdle and are looking to increase returns."
Michael Thomas, manager, policy implementation at Frank Russell Cos., Tacoma, Wash., said pension plans that are underweight in their equity targets are using contributions to rebalance. At the same time, executives who have seen their funded status lowered significantly view this as a good time to review asset allocations.
"Interest in looking at asset allocation has been pretty high in the last few quarters," said Mr. Thomas. "Many plans will consider asset classes they have not considered in the past."
Ms. Hill expects to see a shift away from long U.S. equities and into strategies that have a lower correlation to U.S. equity markets. For the most part, she said, plan sponsors are looking for more creative solutions than increasing fixed-income allocations.
According to the J.P. Morgan Fleming study, about 40% of the plan sponsors that were making strategic shifts were adding to alternative investments.
Nearly half said they plan to reduce risk by adding to long-duration fixed income and alternative investments.
Meanwhile, Goldman Sachs' derivatives and trading research group expects $20 billion to $25 billion will shift into equities this quarter from rebalancing, vs. $39 billion in the first quarter. At its recent height, pension funds pumped $91 billion into equities during the third quarter of 2002 through rebalancing.