Pension fund executives are cautiously hopeful that the U.S. government's $700 billion rescue plan eventually will pull the financial system from under a heap of non-performing assets and restore value to their depressed stock holdings.
Some even are pondering whether to rebalance their portfolio more frequently to make up for the relative drop in equity weighting resulting from the brutal market sell-off — if and when Treasury Secretary Henry Paulson's plan works.
But details of the government's rescue program, initially designed to buy “toxic” mortgage-related paper, have yet to be defined and implemented.
“We rebalanced at the end of August as we try to rebalance twice a year,” said Vermont state Treasurer Jeb Spaulding, who is responsible for the $3.3 billion Vermont State Retirement System, the $1.6 billion State Teachers Retirement System and the $300 million Municipal Employees Retirement System. As of Sept. 30, the state system had 54% of assets in stock, while the teachers system had 57% and the municipal system, 51%.
“Given the market volatility, we have given some consideration to whether we should rebalance again sometime in the next month or two. We don't have an answer to that yet. If we rebalanced, that would have the tendency of putting additional equity risk in our portfolio,” Mr. Spaulding added.
Rebalancing is a costly exercise because it involves transaction costs and may be a difficult decision in unsteady market conditions. To avoid frequent portfolio adjustments, funds have adopted bands that allow for some fluctuations in the asset-class weightings.
Valuations are so low that once confidence returns, the potential for a quick bounce up is significant. The average price-earnings ratio for companies in the Standard & Poor's 500 index is a paltry 11.1 — a far cry from the 17 average of the past four decades. On Oct. 9, the S&P benchmark, which had fallen to a five-year low, slumped 41% below its all-time high of 1,565.15 reached exactly a year earlier, with nearly half of that decline resulting from the last seven sessions.
Investors — disheartened by prior government initiatives that failed to quell the credit crisis in the past 14 months — are not yet prepared to say the storm has passed, as fears of catching a falling knife dwarf hopes of bargain hunting. For instance, noticeably absent from recent bailout efforts are sovereign funds. Many of those funds rushed to invest in what looked like good investment opportunities a year ago, but now they are staying away from the fray.