This was written by Rob Kozlowski, with contributions from Pensions & Investments staffers Arleen Jacobius, Robert Steyer, Christine Williamson and Timothy Pollard, and Bloomberg
A wave of selling gripped global markets Monday as the rout in all but the safest assets deepened.
U.S. stocks joined sell-offs in Europe and Asia, with the Standard & Poor’s 500 index tumbling to its first correction in almost four years. Chinese shares sank the most since 2007, and stocks in Germany officially fell into a bear market. Commodities fell to a 16-year low as crude plunged 6.3%. The yen strengthened and 10-year Treasury yields slid below 2% for the first time since April.
“There is no doubt that the panic begets panic in this market,” Michael Holland, chairman at Holland & Co., said in a Bloomberg Television interview. “Yet you called Black Friday, we certainly have Black Monday morning starting for us, so it’s a psychological thing. It’s pervasive. It’s everywhere.”
However, asset owners already either have anticipated performance concerns or are continuing their traditionally pragmatic, long-term approach.
The $25.9 billion Texas Employees Retirement System, Austin, redeemed a $172 million emerging markets equity allocation managed by J.P. Morgan Asset Management earlier this summer because investment staff there “decided to take off some exposure to emerging markets,” said Sharmila Chatterjee Kassam, chief of staff, in an e-mail.
J.P. Morgan remains in the fund’s select manager pool and might be funded again for an emerging markets equity separate account.
“As long-term investors with a diversified portfolio we expect market volatility, but it does not alter our long-term outlook,” said Ash Williams, executive director and senior investment officer at the Florida State Board of Administration, Tallahassee, which oversees $181.3 billion of assets, in an e-mail. “Time and time again, we have seen discipline and patience rewarded. As in the past, we will stick to our long-term, well thought-out strategy and rebalance as appropriate.”
The $45.8 billion Illinois Teachers' Retirement System, Springfield, is “monitoring the situation within the markets carefully and will take all appropriate steps,” said David Urbanek, a spokesman, in an e-mail.
“This latest downturn reinforces the fundamental TRS investment strategy of building a highly diversified portfolio designed to help the system weather market conditions like these when they occur. We do plan for and expect market fluctuations,” Mr. Urbanek added.
Bob Jacksha, chief investment officer for the $11.4 billion New Mexico Educational Retirement Board, Santa Fe, said fund executives “have been somewhat cautious regarding public equity markets for a few months.”
“While we do not tend to stray far from our target allocations, we have shaded to the downside and have been slightly underweight to our target in our overall public equity exposure while holding some extra cash. Market action over the last week has brought us even further underweight, unfortunately.
“We are having conversations about when to redeploy that cash to rebalance to our targets, but have not come to a conclusion,” Mr. Jacksha continued.
“I expect other investors are doing the same, since market action now has them below targets as well. Given the poor performance in international, particularly (emerging markets) equities, I am sure we will have some discussions about our targets. Again, nothing definite at the moment.”
Mr. Jacksha added that fund officials are not surprised by the market downturn, “with (quantitative easing) in the U.S. ending, oil prices falling and other volatile global factors. Not that we are market prognosticators. The markets will go down ... and up; we just don't know when or how much. Blips in either direction are expected.”
Consultants are not seeing signs of concern from institutions regarding today’s sell-off.
Michael Kozemchak, managing director at Institutional Investment Consulting, said, “I haven’t received a single phone call.” Among his retirement clients, “most are mindful of market swings. … They are mindful of the long-term horizon of those (retirement) assets.”
Marina Edwards, senior consultant at Towers Watson & Co., said she has only received a few calls from clients. “In the past when the market headed south, we talked about continuously revisiting asset allocation.”
More than $5 trillion has been erased from the value of global equities since China unexpectedly devalued the yuan on Aug. 11, fueling concern the slowdown in the world’s second-largest economy is worse than anticipated. The rout is shaking confidence that the global economy will be strong enough to withstand higher U.S. interest rates, even as bets ease on a September increase.
The S&P 500 was down 3.9% as of 4:15 pm EDT, bringing its loss from a May high past 11%. The Dow Jones industrial average sank 588 points. European stocks tumbled 5.3%, the most since 2011. Earlier in the day, the MSCI Emerging Markets index slid 5.1% for a seventh straight loss. Basic-resource producers led losses as Brent crude tumbled through $43 a barrel. Treasury 10-year note yields fell as low as 1.91%.
The Chicago Board Options Exchange Volatility index jumped 45.6% to 38.27. It hit an intraday high of 53.29 at 9:59 a.m. EDT. The gauge, known as the VIX, more than doubled last week, soaring 118% to 28.03.
The S&P 500’s rout sent valuations tumbling. The price-to-earnings ratio for the gauge sank to 16.76, the lowest level since the October pullback. Then, the measure bottomed just above 16.50, the cheapest since January 2014.
