Pension funds that didn't rebalance their portfolios back to target asset allocations late last year or early this year missed out on some of the 13.5% surge in equity prices in the second quarter.
But that isn't necessarily a bad thing.
The Standard & Poor's 500 stock index is up 11.85% year-to-date through Aug. 13. That includes a 13.5% rise between April 1 and June 30, largely in anticipation of favorable corporate earnings reports that never really materialized, said Diane Garnick, chief portfolio strategist at Dresdner Kleinwort Wasserstein, New York.
Ms. Garnick said some pension fund officials who may have had underweight equity portfolios and overweight fixed-income portfolios have been hesitant to jump too quickly into the stock market. That caution may end up serving them well.
"Lots of people are saying `yes, we need to move into equities, but we're not sure it's the bottom of the market. If we are going into a bull market, it's always less expensive to be one or two quarters behind the bull than to get in too early,"' she said.
Karen E. McQuiston, head of the strategic investment advisory group at J.P. Morgan Fleming Asset Management, New York, said pension funds that didn't rebalance late in 2002 or early in 2003 probably gave up a couple hundred basis points of performance, depending on their target equity allocations and how underweight those equity allocations were.
"So it's tangible, but not huge, depending on how out of whack you were," Ms. McQuiston said.
Plenty did rebalance
Early indications are that plenty of pension funds did rebalance, however, either because they follow a set rebalancing schedule or because they exceeded their overweight/underweight range for various asset classes.
"Virtually every client we have, over the last couple of years, has refreshed their strategic allocation work and thought about what they want to incorporate in that going forward," said Eve Guernsey, CEO of J.P. Morgan Fleming Asset Management's institutional business for the Americas.
So far this year, roughly 40% of the volume on the New York Stock Exchange has been the result of portfolio trading, or trades involving 15 or more securities in one transaction, Ms. Garnick said. During the week of July 28 to Aug. 1, NYSE officials reported that portfolio trading strategies accounted for 45.5% of the average daily volume on the exchange.
That kind of portfolio trading volume is an indication that pension funds are buying stocks in order to get equity assets back to their target asset allocations, she said.
Watch, don't time
One fund that did rebalance in time to take part in the equity price surge was the $3.7 billion Michigan Municipal Employees' Retirement System, Lansing. Jeb Burns, chief investment officer, said the fund rebalances every year and monitors its asset allocation on a quarterly basis.
"So if there's a huge swing, we can rebalance at the quarter end," Mr. Burns said. "Our job is to watch asset allocation, not try and time the market."
The $1.1 billion Minneapolis Employees' Retirement Fund, which has been closed to new employees for 23 years, rebalances its portfolio at the end of each month, Executive Director Judith Johnson said. That's because the fund pays out $11 million in benefits each month and takes in only about $2 million in contributions. So the bulk of the benefit payments - about $9 million a month - has to come from the sale of the fund's best-performing assets.
This year, real estate investment trusts and fixed income have been the best overall performers for the Minneapolis Employees' fund. Its REIT investments have returned 18% for the six months ended June 30. Lately, though, equities have been performing well, Ms. Johnson said, but not well enough to prevent the fund from selling its REIT and fixed-income assets to pay benefits.
Anecdotally, J.P. Morgan Fleming's Ms. McQuiston said she thinks more pension funds follow time-based rebalancing strategies, as opposed to range-based strategies. But, she said, her research indicates that it doesn't really matter which kind of rebalancing strategy pension funds employ; the important thing is to have a strategy and follow it.
Still, some pension fund executives made conscious decisions to not rebalance. Kurt Winkelmann, managing director and co-head of global investment strategies at Goldman Sachs Asset Management, New York, said the decision comes down to comfort with risk.
"People got drawn in by the high (equity) returns they saw when the markets were going up in the late 1990s," Mr. Winkelmann said. "They decided at that time to violate their policy guidelines and consciously take a big risk relative to their strategic asset allocation.
"Then, when the (equity) markets went the other direction, they decided the markets looked pretty bad and decided not to do anything again."
Investment committees, Mr. Winkelmann said, were probably asking questions like: Why would a pension fund sell equities when they are performing well? On the flip side, why would a pension fund buy equities when they have been doing poorly?
Mr. Winkelmann said he is not in the forecasting business and has no opinion on whether now is a good time for a pension fund that has been waiting to rebalance to do so.
"On the other hand, I think beginning to have the conversation about what you want from your investment policy, that's a worthwhile discussion to start to have," he said.