Record volatility in capital markets contributed to increases in domestic fixed-income holdings and decreases in domestic equities for many defined benefit plans in Pensions & Investments' annual survey of the largest retirement plans.
But some plans did make deliberate allocation moves in the 12 months ended Sept 30, viewing the market chaos as an opportunity to lessen dependence on domestic stocks.
“We definitely made a shift into fixed income,” said William Clark, director of the New Jersey Division of Investments, Trenton, which had $68.2 billion in defined benefit assets as of Sept. 30. “We felt there were some compelling investing opportunities.”
The asset shifts were most visible when broken out by type of sponsor — union, public or corporate — with the most dramatic changes among the union plans.
Domestic stock ownership among those plans declined to an average of 38.8% for the 12 months ended Sept. 30, from 45.2% a year earlier. During the same period, domestic fixed-income assets rose to 34.9% from 24.3%.
The changes came as the equity market, measured by the Russell 3000 index, returned -8.64% during the 12-month period while the domestic fixed income market, as measured by the Barclays Aggregate index, was up 10.56%.
Consultants say the market accounted for most of the moves, as union executives largely sat on the sidelines waiting for the turbulence to play out.
“People were afraid to make a significant move in any asset class, and reallocations were not possible” because there simply were no buyers, said Ian Jones, president of The Marco Consulting Group in Chicago, which specializes in working with Taft-Hartley plans.
Mr. Jones recalled talking some clients "away from the cliff” in November 2008 and early 2009 when they were considering bailing out of equities. “You had to do it with education about past market rallies and corrections," he said.
Some union plans ignored their consultant's advice to rebalance in 2009, said Alan D. Biller, a consultant to Taft-Hartley union plans and president of Alan D. Biller & Associates in Menlo Park, CA.
“Some plans were afraid,” he said. “When advised to rebalance, they froze,” he said.
Fixed-income holdings also increased among public plans, but at a significantly smaller rate than their union counterparts. Domestic fixed income made up 25.3% of assets as of Sept. 30, 2009, up from 24.7% a year earlier. However, during the same 12-month period, domestic stocks declined to 32.4%, from 35.4%.
The shifts at public plans appear less dramatic because executives at those funds were quicker to rebalance, according to interviews with consultants and plan executives.
The Hawaii Employee's Retirement System saw a -6% return on U.S. equities in the 12 months ended Sept. 30, but the return on its fixed-income investments was 14.05%.
“That 14.05% one-year return ending Sept. 30, 2009, is the best we've seen in a very long time for one-year performance numbers," said Rod June, the $9.8 billion fund's chief investment officer. “That is not the typical return of fixed income for a one year period.”
Mr. June said by the first quarter of 2009, the market volatility was having a major impact on the fund's asset mix. U.S. equities had declined to 33.7%, from its 41% policy allocation. Total fixed-income holdings, on the other hand, had increased to 37.5% of the portfolio, despite a 28% target, he said.
Mr. June said his fund started rebalancing the portfolio and moving fixed-income assets to U.S. and non-U.S. equities last spring. The rebalancing allowed the Honolulu-based fund to take advantage of the equity market rally that happened after prices bottomed in early March, he said.
“As we shifted more assets to public equities from fixed income beginning in the spring of 2009, we were able to capitalize on that upside movement, which had really taken off,” Mr. June said.
New Jersey was an exception to the rule among public plans, taking a deliberate approach to increasing its fixed-income holdings.
In the 12 months ended Sept. 30, New Jersey increased domestic fixed-income holdings by 10.1 percentage points and decreased domestic equities by 4.2 points, according to data submitted to P&I.
Mr. Clark said division officials began a push in the fall of 2008 to buy more fixed income. He said the state eventually shifted $3 billion from domestic equities, cash and U.S. Treasuries into investment-grade corporate bonds, bank loans and other high-yield investments. (Mr. Clark resigned his post effective Feb. 5.)
“There wasn't a lot of liquidity,” he said. “We had to buy mostly in the secondary market from holders of securities.”
In March and April 2009, Mr. Clark said there was concern that the bond run-up was over. So New Jersey was quick to alter its strategy again, he said.
“We went from being strong net buyers to strong net sellers (of credit),” he said, noting the state started moving money back into domestic equities.