Pension funds and investment consultants are taking a measured approach following Sunday's Greek referendum vote against austerity plans.
“Near term, the direct effect is de minimis. Our exposure to Greece is probably below market exposure. The only exposure is through index funds. As a percentage of the global market, Greece is small,” said William R. Atwood, executive director of the Illinois State Board of Investment, Chicago, which oversees $15.8 billion in defined benefit assets.
“Our concern is any disruption Greece can bring to the European economy and the global economy,” Mr. Atwood said. “To that extent, the global markets have baked in the problems of Greece,” already pricing them in the markets. “Like anybody else, we are keeping an eye on it, but we are not overly concerned.”
Mr. Atwood noted, as of the market close July 2, ISBI's exposure to Greece in its public markets portfolio was about $484,000. That exposure was entirely in the board's MSCI ACWI ex-U.S. index portfolio managed by State Street Global Advisors. The total value of that portfolio is $574.9 million.
Angela Miller-May, director of investments of the $10.2 billion Chicago Public School Teachers' Pension & Retirement Fund, said in an e-mail that a Greek exit from the eurozone “would most assuredly be a bad thing for Greece and the Greek citizens. It could affect possible agreements between Greece and other European countries regarding financial assistance and adjustments to the Greek economy. U.S. Treasuries are expected to remain strong and attractive during this crisis and that's a good thing across multiple markets.”
The Florida Retirement System defined benefit plan, whose $147.7 billion in assets are overseen by the Florida State Board of Administration, has $5.5 million in exposure to Greece in emerging markets equity portfolios, the vast majority of which, some $4 million, “is spread across various active portfolios,” said John Kuczwanski, communications manager at the Tallahassee-based FSBA, in an e-mail.
“Given the de minimis holdings, responses would appear to be inconsequential compared to the current discussion on the topic,” Mr. Kuczwanski said.
The FSBA oversees $181.4 billion in total assets.
“It's easy to lose sight of what a de minimis percentage of the global market Greece plays given the level of attention it is receiving,” Mr. Atwood said. “The population of Greece is 11 million, much smaller than Illinois, and its economy is smaller than Illinois'.”
As far as any ramifications should Greece exit the eurozone, “My expectation is that the immediate consequence would be fairly negative. One would go from holding euro-denominated instruments to drachma-denominated instruments. Unfortunately, currently there is no market for drachma, and conventional wisdom is that the currency would immediately devalue, so too would assets priced in drachma,” Mr. Atwood said in a follow-up e-mail.
The Chicago teachers' pension fund has “zero exposure to Greece,” whether in stocks or bonds, Ms. Miller-May said. “The situation in Greece will have little direct impact on” the pension fund.
“The impact to euro-denominated assets may indirectly impact (the fund) as (it) does have an approximate exposure to the euro of 6.93%” of assets, Ms. Miller-May said, adding the fund hasn't had any asset allocation adjustments as a direct result of the Greek situation.
“The expectation is that this situation will continue for some time and impacts to other markets such as the U.S. will come through exposure to countries that may or may not participate in bailout measures for Greece,” Ms. Miller-May added.
Michael Brakebill, chief investment officer for the $42.3 billion Tennessee Consolidated Retirement System, Nashville, said in an e-mail, “At the same time, while unsettling, it appears the key issue lies in the potential for the events in Greece to spread into the core of the eurozone and we believe European authorities have the tools at their disposal to contain the crisis. However, rising uncertainty has, and will continue to impact the value of financial assets and economic growth. Additionally, while the events in Greece are a concern, we are watching the slowdown in Chinese economic growth closely because we believe that trend has a great potential to impact asset prices.”
Tim Barron, chief investment officer at consultant Segal Rogerscasey, said the two obvious short-term consequences of this news is “increased volatility” and “some flights to quality” away from euro-denominated bonds and toward owning U.S. dollars and Rogerscasey, said the two obvious short-term consequences of this news is “increased volatility” and “some flights to quality” away from euro-denominated bonds and toward owning U.S. dollars and Treasuries.
“What we don't know is what happens next,” Mr. Barron said.
Mr. Barron cited three possible scenarios: The first is that “the path of growth that Europe is now on could continue”; or “Greece could default, which would create volatility in the markets”; and the third scenario is “the eurozone capitulates and backs off on some of the austerity applied to Greece,” which could cause Italy and Spain to insist on similar capitulations.
Another investment consultant who asked not to be named said “lingering uncertainty is always bad for the capital markets.”
“A solid resolution one way or the other is probably the best long-term solution for the capital markets,” the consultant said. “Regardless of a period of continued negotiation drama or final resolution, the realistic near-term ramification for the capital markets is increased volatility and a likely 'flight to quality' throughout the world.”