Institutional investors' asset allocations, which have grown more risky in the 10 years following the financial crisis of 2008-2009, are prompting some to worry about the recent plunge in equity markets and rise in bond yields.
But industry sources said it's not time to jump into lifeboats just yet.
"If you're an institutional investor, then some if not most of your investments are for distant goals/liabilities," said Michael S. Falk, partner at money manager consultant Focus Consulting Group LLC, Long Grove, Ill. "Let's reprise Mr. Eastwood's 'Dirty Harry' once again: 'Now you've got to ask yourself one question. Did I asset allocate right? Well, did you?'"
What has many pension fund investment executives concerned is that most have riskier investments than during the last recession, said Jay V. Kloepfer, executive vice president, director of capital markets research at Callan LLC, San Francisco.
"That 60%/40% portfolio back then is now 80%/20%," Mr. Kloepfer said. "Since then, investors have diversified into growth assets, not fixed income. They've whittled down their flight to quality, so it could be more painful if we hit a recession. That has people concerned. But again, they've planned for that" with their current asset allocations, "so they can withstand that."
Mr. Kloepfer added: "There's nothing a $50 billion pension fund should do based on two days of data … It's tempting to think that way, that you have to sell, but they've set up their asset allocation to handle the volatility. If they can't, they shouldn't buy stocks. You set it up and you ride the market."
The recent concerns developed after yields in 10-year Treasuries rose from 3.09% on Sept. 24 to as much as 3.23% on Oct. 5 and was followed by two-day declines Oct. 10-11 of 5.28% in the Standard & Poor's 500 stock index and 5.21% in the Dow Jones industrial average. Both stock indexes recovered slightly on Oct. 12, with the S&P 500 closing up 1.42% at 2,767.13 and the Dow up 1.15% to close at 25,339.99.
Mansco Perry III, executive director and chief investment officer at the $96.2 billion Minnesota State Board of Investment, St. Paul, said he was looking at the market plunge "and trying to view it with some perspective. … It's not comparable to the 1987 crash other than they happened about the same time in October. If you look at where the market closed on (Oct. 10), it is still above the close of three months ago."
Mr. Perry said that the board is only doing "normal rebalancing" of its asset allocation, "but not precipitated by (Oct. 10), but planned earlier. We'll review what's going on to see if adjustments are warranted. In other words, review what's happening, but don't let it dictate your strategy."