Wishing and hoping.
That's what pension fund executives report they were doing when the domestic stock market suffered its biggest one-day point drop in history.
They were wishing they could buy stocks, and they were hoping their money managers were bargain shopping on their behalf.
Those are among the results of a Pensions & Investments' fax poll, conducted last week.
Of the 163 pension executives responding to the poll, only six directed their defined benefit equity managers to act on Oct. 27, when the market plummeted 554 points. Of those, three reduced equity exposure slightly and three instructed their managers to buy if good opportunities arose.
By Oct. 28, nine defined benefit plan officials directed their managers to start buying and none trimmed equity exposure further.
The overwhelming majority, however, left their equity managers alone to navigate the choppy waters.
On the defined contribution side, only 10 plan sponsors reported any increase Oct. 27 in participant activity. They reported an average of 13% more asset transfers than usual. But 13 reported increased transaction activity on Oct. 28, when participant transactions rose 16% over normal levels.
(The results don't show whether participants were buying or selling equities.)
Only 32% of defined benefit fund executives called their equity managers over the two-day period. But 54% said their managers called them to discuss market activity; each got an average of two calls.
Pension executives responding to P&I's poll control more than $324 billion of defined benefit plan assets and more than $79 billion of defined contribution plan assets.
Managers report little activity
In a separate, smaller survey of equity money managers, six said they increased their equity holdings on Oct. 27 by a total of $137 million. Of the 38 respondents, two reduced equities that day by $50 million.
Equity managers were more ready for action on Oct. 28. eight said they bought $177 million of stocks on Tuesday; only one sold - about $30 million worth.
Managers' average cash position of 7% remained the same on both days.
The equity managers who responded to P&I's survey manage $275 billion in total assets and $95 billion in tax-exempt assets.
For both plan executives and their equity managers, agility was key to exploiting the rock-and-roll markets of Oct. 27 and Oct. 28.
A big day at the YMCA
"Because we manage our assets in-house, we can be extremely reactive to market conditions. We can turn on a dime and we do," said Harold C. Smith, president and chief executive officer of the $2.7 billion YMCA Retirement Fund, New York.
"We meet every morning and keep up-to-date buy lists of stocks and follow them all the time. On Monday (Oct. 27), when we saw stock prices drop into our buying range, we starting buying."
Mr. Smith said the fund had been "selling into strength" prior to Oct. 27. Because of profit taking, the YMCA fund was slightly underweighted in equities at 36%, and was able to use the buying opportunity to bring equities up a bit past the 40% target allocation.
"It was very fortuitous for us that the market did what it did when it did," said Mr. Smith, who added that Oct. 27 was an extremely exciting day around his offices. "I was running up and down the stairs all day to talk to our internal managers."
Executives at some larger funds and those with external managers probably didn't have as much fun as Mr. Smith.
For example, Tom Herndon, executive director for the $70 billion Florida State Board of Administration, Tallahassee, said the fund was close to rebalancing into stocks on the Tuesday after the big correction, but didn't have enough time to execute.
What CalPERS did
CalPERS - the $122 billion California Public Employees' Retirement System, Sacramento - did some stock buying Oct. 27 and 28, but wasn't "a huge player. We pretty much held the course," said fund spokesman Brad Pacheco.
"Some of our members were worried about losses and called. But we were well within our asset allocation range. If the decline had gone on for a third or fourth day, it might have represented a buying opportunity. At that point, it's possible we would have dipped below our asset allocation and would have had to rebalance," said Mr. Pacheco.
But what little buying the giant pension fund did do during those two days was enough to calm the jitters of some other investors.
"We're on the West Coast and when we heard CALPERS was out buying, we knew we should relax a bit and buy if we wanted to," said Paula Ponsetto, director of marketing at Beverly Hills, Calif.-based manager Pacific Financial Research.
Ms. Ponsetto said her firm saw a huge increase in inquiries, and cash, on Oct. 27 from individual investors interested in PFR's conservative stock mutual fund, the Clipper Fund.
"It's just a sleepy, little fund, just $750 million. We usually take in about $300,000 or $400,000 a day. But on Oct. 27, we were getting desperate calls from people who demanded that we fax them prospectuses and applications so they could wire the money to us. They were antsy to get in that day and buy the dip. We took in over $1 million that day," she said.
Sleeping through the storm
One pension fund was ready for the market drops because of an innovative rebalancing strategy. "We say that this is the one fund that can sleep through a storm," said Doug McCalla, investment officer of the $2 billion San Diego City Employees' Retirement System.
The strategy correlates expected returns and expected volatility in the asset classes in a portfolio to come up with trigger points at which executives automatically rebalance the asset class. It also identifies the underweighted asset class that will get additional money.
Mr. McCalla said the strategy is reactive, rather than anticipatory, because the target weighting trigger points are based on actual asset values, rather than guesses at future market moves.
The complicated correlation models increase the portfolio's efficiency and "force us to have a discipline which makes us sell high, to take the profits in an asset class and bring that asset class back to target," said Mr. McCalla.
Mr. McCalla said the fund's trustees understand the strategy well enough now that they allow the staff to rebalance when necessary.
In a Sept. 25 rebalancing, domestic equities dropped to the target 41% allocation, down from 44%. The fund then invested the proceeds - $58 million - in international bonds. As a result, Mr. McCalla said, "we had already taken the profits we made in equities off the table and we didn't lose the gain when the market dipped Oct. 27."
On Oct. 28, fund executives moved 2.3% of assets - or about $44 million - out of domestic bonds, which were then overweighted, and into international equities, which were certainly out-of-favor that day.
Newcomers not scared off
The San Diego city pension fund may be an old hand at surviving the stock market roller coaster, but some pension funds are new to the game.
The $8 billion Indiana Public Employees' Retirement Fund, Indianapolis, only began investing in equities in May. It has about $800 million in stocks now, and has another $4 billion to invest over the next three years in chunks of $100 million per month.
Garth Dickey, the fund's director, said the market volatility did not rattle staff at all. In fact, officials have felt that if there were a true market correction - of 20% or more - they might go to the board of trustees and ask to accelerate the investment timeframe to take advantage of a buying opportunity.
But the 7% market decline Oct. 27 was not a big enough or painful enough drop to do that, Mr. Dickey said.
"I was out of the office that day (Oct. 27) and heard about the market drop at about midday, when it was down about 545 points. And my reaction then was that it just wasn't the 'market correction' people were proclaiming it to be. A real market correction would have to be bigger than 20% to count in my view," he said.
Meanwhile, the $17 billion South Carolina Retirement System, Columbia, is still waiting for the state's Senate to allow equities to be placed on the list of permitted investments, said Richard Eckstrom, treasurer.
"Those senators who were confused about why we needed to invest in stocks last year are probably just as confused now by market volatility. But such market volatility is exactly why we should be allowed to diversify out of fixed income into other asset classes.
We need to limit risk through diversification and, if we could have put our cash to work to buy stocks, we would have taken advantage of the opportunity to buy equities," Mr. Eckstrom said.
Mr. Eckstrom said few are focusing on bond market volatility lately, where the South Carolina fund was able to take advantage of conditions. The fund sold off $100 million of U.S. Treasuries Oct. 27 and reinvested the assets in higher-yielding corporate bonds with matched maturities.
Paul G. Barr contributed to this story