Finding the 900-page Pension Protection Act a tough read? Not to worry.
Officials at Allegiant Asset Management Co., Cleveland, pored over its pages and have drawn interesting conclusions.
They think the bill's calls for employers with defined benefit plans to erase funding shortfalls, and for those with defined contribution plans to automatically enroll workers in savings programs, may create a domino effect on equity and bond investments.
Brian Stine, an investment strategist at Allegiant who examined the market implications of the new law, said in an interview that he expects demand for U.S. and non-U.S. equities to increase gradually — over the next several quarters — as employees are automatically enrolled in DC plans and as default allocations shift to a blend of stocks and bonds from money market accounts.
The impact on the bond market, however, could be more immediate. That's because many corporations that elect to maintain their defined benefit plans will turn to bonds to minimize risks as they seek to reach fully funded status. Increased appetite for bonds, particularly instruments with 10-year maturities or more, could help keep interest rates lower, and the yield curve flatter, than they might be otherwise, Mr. Stine said.
"We've seen that already in Europe, with serious European pension fund reform causing extreme demand for bonds," he said. "With this (U.S.) reform, corporations are being forced to do a better job of matching assets to liabilities."
The situation creates opportunities for both equity and bond managers. Equity firms, for example, could roll out more innovative products to individual investors that mimic institutional strategies. Instead of a traditional 60/40 blend of stocks and bonds, managers could create funds that include allocations to non-U.S stocks, commodities, emerging markets and hedge funds, he said.