Pension fund executives, money managers and consultants are keeping a close eye on the potential downward pressure on financial markets and institutional portfolios due to recent sharp falls in the oil price.
Money management executives cited a case of oversupply and a reluctance by the Organization of the Petroleum Exporting Countries to cut production as the price continues to plummet. The recent sharp falls in the oil price reflect OPEC putting the squeeze on non-OPEC producers (primarily shale oil), to see who will blink first,” said executives at Schroders PLC in a statement issued Jan. 6.
As Pensions & Investments went to press, the price of oil had dropped to $48.36 per barrel, from a high of $107.26 a barrel in June last year.
The impact of low oil prices is mixed, but already are being acknowledged and felt by institutional investors.
“There is a lot of concern from clients,” said Tapan Datta, London-based head of asset allocation at Aon Hewitt. He said discussions are taking place among investors, looking at how to “protect themselves if things go seriously wrong. There is no doubt that it should be considered.”
One of the main concerns for pension funds would be the link between falling oil prices and lower inflation.
Pension fund liabilities are where the oil price drop could “bite,” said Mr. Datta, with falling inflation leading to even lower bond yields, and a subsequent rise in liabilities.
“Everybody is worried that the price (of oil) doesn't seem to have a floor at the moment,” added Alastair Gunn, U.K. equities portfolio manager at Jupiter Fund Management PLC in London. “It is making equity holders quite jittery about dividends, and is making bondholders jittery about the risk of defaults.”
Pension fund executives are certainly paying attention. Ricardo Duran, spokesman for the $189.7 billion California State Teachers' Retirement System, West Sacramento, said the bulk of the fund's oil holdings are in the global equity and fixed-income allocations. As of Dec. 31, the $107.8 billion global equity portfolio invested about 5.9% in the oil and gas sector, covering areas such as exploration and production, refining and marketing, and storage and transportation, he said. That equates to about $7 billion.
Just less than 8%, or about $1 billion, of the $13.4 billion fixed-income credit portfolio is in oil, invested mostly in the independent and integrated energy sectors, in midstream holdings, oil field services and refining, he said.
“(The falling oil price) has exerted a downward pressure on the portfolio,” the spokesman added in an e-mailed comment.
CalSTRS executives are “closely monitoring the situation before determining what, if any, moves to make,” said the pension fund spokesman. “CalSTRS is a long-term investor and, while the drop in oil prices has been a cause for some concern, we have to balance that against growth opportunities the situation may create in other sectors of the economy in which we're also invested.”