Good Strategy or a Contrarian Signal?

Large corporate pension funds have more of their portfolios invested in bonds than in equities for the first time in over a decade, according to pension consulting firm Milliman. Like individual investors, the pension funds don’t like what they see in stocks. There’s a lot of volatility and downside risk, and the positive potential isn’t enough to offset those negatives.

Assets into equities dropped to 38 percent in 2011 from 44 percent in 2010, while fixed income climbed to 41.4 percent from 36.4 percent in the same time period. The data reflect a major shift from five years ago, when assets in stocks were double those in bonds, and marked the first time the allocation to bonds exceeded stocks in the history of the Milliman survey.

The retreat from stocks and into bonds is a trend that will continue, managers and consultants say, in response to pension deficits that are soaking up company cash and leading to a broad de-risking.

The reasons corporate pension plans are taking this step are similar to the reasons retail investors are doing the same. When a corporate pension plan is mature, and when an individual is in or near retirement, the potential damage from major stock market losses or even the volatility of an erratic market is too high. These investors can’t count on the long run to bail them out. Corporations also are required under a recent law to improve their pension funding within seven years, so they can’t take the risk of a sudden decline in the portfolio.

Some will view this situation as a good signal that now is the time to buy stocks. But keep in mind that the reduction in stock investments here isn’t a market timing decision. The pension funds and many individual investors aren’t forecasting future stock market returns. Instead, they’re saying that regardless of the returns over an extended period the volatility of returns within that period is too high and there is too much uncertainty. They aren’t timing stocks, they’re deciding they want less of their assets in that market. They don’t want to take the risk of having to make up losses or come up with cash to pay benefits and expenses during a market downturn.