As U.S. stock prices slide, a handful of leading U.S. pension funds are pumping money into the market.
The State Teachers Retirement System of Ohio, Columbus; New Jersey Division of Investment, Trenton; and Michigan's Bureau of Investments, Lansing, put $530 million into the domestic equity market.
Others funds, such as the Retirement Systems of Alabama, Montgomery, and the Minnesota Board of Investments, St. Paul, are prepared to buy. Minnesota was waiting for the market to drop further; Alabama was waiting for funds to become available.
For some pension funds, the market drop triggered large-scale buying.
Between Sept. 21 and Sept. 23, the $51 billion Ohio Teachers had purchased $400 million in domestic stocks. The buying spurt was to keep the fund's domestic equity weighting at 45%, said Herbert Dyer, executive director.
Others were content to nibble at sectors where they see the promise of earnings growth.
The $75 billion New Jersey fund spent $25 million to $30 million on U.S. financials during the first week of the market selloff.
"The sector sold off and we put some money into that," said Maneck Kotwal, investment officer. He declined to name specific stocks, but said he expects positive earnings in the sector going forward.
At the end of the day Sept. 23, New Jersey was slightly above its 65% allocation to internally managed domestic and international equities. The system, however, has license from its board to be 70% invested in equity markets.
Still, the drop did not trigger wholesale stock purchases by U.S. pension funds. Indeed, many big funds had either rebalanced portfolios earlier in the summer or were content to stand on the sidelines because their allocations were well within their target ranges.
Those staying away from the markets because their portfolios were within their targets included two giants -- the $160 billion California Public Employees' Retirement System, Sacramento, and the $110 billion New York State Common Retirement Fund, Albany.
In the face of the drop, pension fund executives routinely said their goals were to stick to their funds' asset allocation levels.
Falling indexes
Between Sept. 20 and Sept. 30, the Dow Jones industrial average and the technology-heavy Nasdaq fell 4.3%; the Standard & Poor 500 dropped 3.9%.
That drop also pushed the indexes further away from their 1999 highs. At the end of trading last Thursday, the Dow had fallen 8.7% since its high in mid-July.
The falling markets undoubtedly hit U.S. pension funds hard. The nation's 1,000 largest pension funds had an aggregate exposure of 46.2% to domestic equities and 11.8% to international equities as of Sept. 30, 1998 (Pensions & Investments, Jan. 25).
"With the market down (nearly) 10%, we're a bit of a player," said Alan Van Noord, director of Michigan's Bureau of Investments, which oversees $48 billion in state pension assets. "We've only put a little to work," he said, adding the fund's in-house staff had invested $100 million in domestic equities last week. Funding came from its cash position. He declined to name the stocks or sectors, but said companies in the financial and technology sectors looked cheap. Michigan might consider more buying if the markets were to drop another 2%, he said.
Not a bear market
But most pension executives interviewed agreed the September drop was not a harbinger of a bear market. Instead, most saw the decline coming from fears of rising interest rates, along with a host of factors ranging from the U.S. trade deficit to portfolio managers taking profits to the soaring prices of gold and oil.
Other funds held off on buying -- for now. "If it drops much more, we'll probably be buying soon," said Howard Bicker, executive director, of the Minnesota Board, which manages about $40 billion in pension assets. Buying would come to "maintain our asset allocation." The Minnesota Board currently has a 50% allocation to domestic equities. He did not say to what level the domestic markets needed to drop to spur the system into buying. Any decision to buy would be made in relation to the movement in international equity markets and bond markets, he added.
The $24 billion Retirement Systems of Alabama had not done any buying as of Sept. 28. The fund had hit the end of its fiscal year the week before and its assets were being audited by the state treasurer's office, effectively forcing the in-house investment staff to sit on its hands. But by Friday morning, the fund was a net buyer of $10 million, adding to some of its existing positions in the financial sector and also buying some technology stocks, said Marc Green, director of equities. The fund had a 40% exposure to domestic equities and 7% to international, he said.
Success stories
Alabama staffers also like the financials, even though that part of its portfolio was down 8% for September as the month drew to a close. Merrill Lynch & Co., which was trading around $66 per share last Tuesday, could be one possible buy, he said, if it fell a little further. "Two months ago, we bought it at $63 and sold it at $78," Mr. Green said. The fund also recently bought Morgan Stanley Dean Witter Discover & Co. when it was between $82 and $83 per share, and sold most of its position when it spiked to the high $90s.
The financial sector could have relatively stable earnings growth, but is far from a sure thing, Mr. Green said, noting many of the stocks were trading on interest-rate volatility.
Also, recent woes like those suffered by Bank One Corp., which saw its shares plunge at the end of August when it said profits would fall short of expectations, prevented Mr. Green from giving the sector a blanket endorsement. With financial companies, he said, he's "worried about further cockroaches coming out of the cracks."
The $29.5 billion State Retirement and Pension System of Maryland, Baltimore, was slated last Friday to begin moving $450 million from its small-cap holdings into large-cap value stocks; the decision, however, was made before the market began its downward spiral on Sept. 21. It also stood ready to take $150 million from cash flow and invest it in large-cap value stocks.
Some net sellers, too
Not all funds making moves were net buyers. The $5.3 billion Montana Board of Investments, Helena, was a net seller of $21 million in domestic equities, taking the drop as an opportunity to shift some names of technology stocks, said James Penner, chief investment officer. And the earlier red-hot U.S. equity markets, already had prompted some pension funds to shift or rethink their positions.
Oregon Public Employees' Retirement Fund, Salem, had a 41% exposure to domestic equities in late July, above its target range of 30% to 40%. The fund decided to sell $1.3 billion in stocks at the time and invest in U.S. bonds, said Michael Parker, spokesman for the $32 billion fund. It now has a 35% exposure to domestic equities.
The $95 billion Florida State Board of Administration, Tallahassee, is prepared to make a 2% cut to its domestic equity allocation, which is currently 60% of the fund, said Ken Menke, assistant chief of domestic equities. It would then raise its allocation by the same amount to international equities, now 8%.
The move is not in reaction to last month's market drop, Mr. Menke said. "We're not viewing the market pullback as a buying opportunity and we're not particularly frightened to sell into it," he said. Rather, Florida "has done very well in domestic equities while international has lagged," Mr. Menke said.
