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Low Trading Volumes Potentially a Pension Problem.
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Low Trading Volumes Potentially a Pension Problem.

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Low Trading Volumes Potentially a Pension Problem.

Low trading volume is due in part to large institutional investors like pensions that are sitting out the rally. Contrary to what some think, they might not ever leave the sidelines.

Strategists and analysts expect them to come back when the stability of the stock market convinces the guys running these $1 billion-plus pools of capital they won’t lose their shirts (namely, money for pension payouts).

But the institutions themselves are telling a different story. Because of equity-risk controls they put in place after the 2008-2009 market wipeout, they may not leave the sidelines at all. There has been a shift in the way that institutions, pensions specifically, model their portfolios, and much of that change has been codified.

“Pensions aren’t coming back. They’re hedging their assets and that means owning more bonds,” said Steve Charlton, director of consulting services for NEPC. NEPC helps guide the asset allocations of pensions and nonprofits, and its clients have more than $655 billion in combined assets.

J.P. Morgan strategist Thomas Lee is among those attributing low volumes to a pullback in stock investing from institutions, and cited historical evidence showing that after previous pullbacks, pensions returned to the stock market. But history may not be the best guide. The last few years have seen a large-scale diversification among pensions, so even if these institutions increase equity, they don’t plan to return to the U.S. stock market in force.

For example, the roughly $75 billion North Carolina Retirement System cut its exposure to domestic equity by 2% in 2010 and 10% last year. And the $154 billion Florida State Board of Administration has also shoveled cash into alternative investments like hedge funds and private equity.

It just got permission from its legislature to boost its strategic investments, such as private equity, real assets and hedge funds, up to 16% of its portfolio, which would result in a cut of four percentage points to its global equities portfolio. But even a small proportion of the fund is a big lump sum — about $6 billion.

Yes, that’s billion with a “b.”
The previous standard for a typical pension plan was 60% equity and 40% fixed income, which concentrated most of the portfolio’s risk in equities, said NEPC’s Charlton. So after 2008, when the stock market crash took a big bite out of their portfolios, there has been a flurry of equity cuts.

There has also been a shift of perspective–funds have shifted their outlook on domestic equities to a global view. Florida is one of those funds. It combined domestic and foreign equity allocations into one global portfolio, making it easier to move investments across borders.

Some of Florida’s funding has gone back into equities by way of hedge funds with a long/short strategy, said Dennis MacKee, director of communications for the Florida SBA. But so far, they only make up about a third of its hedge fund portfolio, which is less than 6% of the fund.

And as Charlton points out, it’s likely that the days of institutions going long U.S. stocks are over.

“It was definitely a reaction to too much volatility in portfolios,” said Charlton, “I don’t think clients are going to back out of that at this point. They’re enjoying more consistency in their portfolio returns, a lot more diversification and fewer surprises in the ultimate outcomes. Investors are done with surprises.”

Low Trading Volumes Potentially a Pension Problem - MarketBeat - WSJ

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