Pension funds’ move to buy stocks doesn’t come because officials think this is a particularly good time to buy equities. Rather, according to a Dow Jones news report, the pension funds are boosting their equity holdings to bring their portfolio allocations back up to levels called for in their investment policy.
Dow Jones said pension funds typically allocate 60% to 70% to stocks, but plummeting markets have thrown their ratios of stocks versus fixed income and other asset classes all out of whack.
Since pension funds often take some time before they adjust their asset allocations in response to sharp market moves, some experts believe their stock buying will pick up pace over coming weeks and likely continue through the fall.
“We have been rebalancing, naturally, given the market,” Sherry Reser, a spokeswoman for the California State Teachers Retirement System, or CalSTRS, told Dow Jones. The $96 billion pension fund spent $1.2 billion to buy stocks during July to make up for the market declines.
Another giant fund, the California Public Employees’ Retirement System, or CalPERS, picked up stocks worth $200 million for every 50-point drop in the Standard & Poor’s 500 Index during the height of the market tumble last month, Dow Jones said. CalPERS has $150 billion in assets.
“As the stock market declines, we look for opportunities,” spokesman Brad Pacheco told Dow Jones. “We have been taking profits from our fixed income portfolio and buying some stocks.”
No Universal Prediction of Market Impact
The pension fund stock buying apparently isn’t over yet. Consultants and money managers say there is built-up demand for rebalancing for August. It should also extend to a period in October as well.
The issue is an especially significant one for large plans. After all, a small drift in a $100 billion-plus plan could involve trades worth billions of dollars. But smaller plans take their time before doing the necessary trading to accomplish the rebalancing.
Just how important the rebalancing trend is to the market is still a matter of some debate. Some say market drops would have been particularly steep if the pensions hadn’t been out buying stocks, but other market observers think the impact was more like a small ripple in a very big pond.
Still other investment professionals point out that it is possible to rebalance without putting fixed income securities on the selling block and snapping up equities.
In a move designed at least in part to steer clear
of transaction costs, they contend that a fund could
rebalance by taking money to fund benefit payments out of
fixed income while using new pension contributions to buy
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