Market Lessons for Investing Plan Assets

April 30, 2013 ( – The economy is experiencing some familiar trends, but certain details should dictate different investing reactions.

Andres Garcia-Amaya, vice president and market strategist at J.P. Morgan Asset Management, noted that fixed income investments have had a great 31-year run, and interest rates are as low as ever. But, this means the only way to go is up, and bond prices will fall.  

He told attendees at the 42nd Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Management at the University of South Carolina, and co-sponsored by PLANSPONSOR, that this does not mean retirement plans should move assets out of fixed income altogether. Plan sponsors need to look at other fixed income asset classes not as influenced by interest rates, such as commodities, high yield funds and emerging market local denomination debt.  

Garcia-Amaya shared data from Standard & Poor’s, which shows that equities have reached an inflection point similar to that reached in March 2000 and October 2007. The data showed that following those prior inflections, the market had a steep drop. However, he noted that the difference this time is that there is a lower price to earnings (P/E) ratio. “Folks are willing to pay less [for earnings], and fixed income yield [will trend] lower, so there’s no other option but equities,” he stated.

It is important for plan sponsors to think globally about their retirement plan portfolios, Garcia-Amaya said. He told attendees that global economies are roughly growing at 4%, driven by emerging markets (EM). Over the last three years, 81% of global growth has come from EM.   

Why will EM continue to grow at a faster pace? According to Garcia-Amaya, it is because EM economies still have the same advantages; they still have relatively low labor costs, but increasing labor costs in some  EM countries have led the populations to consume more. In 2000, one-third of global consumption was by U.S. consumers, he noted, and now 35% of global consumption is by EM consumers. Large cap companies are benefitting. So, one way to invest in EM is to invest in well-known firms that have a global presence, Garcia-Amaya suggested.  

Plan sponsors can also invest directly in EM, but Garcia-Amaya noted that many are strategically underweight in EM equities. They are investing 3% or 4% in EM equities because that was the weight for EM in the MSCI All Country World Index in 2002. However, the weight of EM is now 12%, and plan sponsors have not adjusted their portfolios accordingly. It is important for them to look at which emerging markets are doing the best when adjusting portfolios.  

Garcia-Amaya concluded that keeping these things in mind can help in constructing a well-diversified retirement plan portfolio.