While many continue to debate if what with every passing day increasingly looks like a global recession, one from which the US will not decouple no matter how many "virtual portfolio" asset managers claim the contrary, there are those who without much fanfare are already taking proactive steps to avoid the kind of fallout that the markets have hinted in the past month of trading, is inevitable. Some such as Calstrs: the nation's second largest pension fund with $191 billion in assets (smaller only than Calpers), which as the WSJ reports is "considering a significant shift away from some stocks and bonds amid turbulent markets world-wide."
The move represents "one of the most aggressive moves yet by a major retirement system to protect itself against another downturn." A downturn which the pension fund implicitly suggests, is now inevitable.
According to the WSJ, the top investment officers of the California State Teachers’ Retirement System will move as much as $20 billion, or 12% of the fund’s portfolio, into "U.S. Treasurys, hedge funds and other complex investments that they hope will perform well if markets tumble, according to public documents and people close to the fund."
Actually considering the relative underperformace of hedge funds, which have largely underperformed the market both during the upcycle, and have fared no better during the volatility of the past month, Calstrs may want to just buy whatever Treasurys China has to sell. Which, incidentally, also answers a suddenly very pertinent question: if China is selling US paper, who will buy it? Well, pension funds for one - the same entities who have had an abnormally heavy allocation to stocks in recent years, and now are seeking to cash out. Which while favorable for bond yields, is hardly good news for stocks - because in this illiquid market, and painfully thin tape, just who will buy the tens of billions of stocks that pension funds will decide to sell.
And it will certainly be more than just Calstrs: once one fund announces such a dramatic shift in strategy, most tend to follow.
So when will the Calstrs reallocation take place? According to WSJ," the board is expected to discuss the proposal at a meeting later today in West Sacramento, Calif. A final decision won’t be made until November. The new tactic—called “Risk-Mitigating Strategies” in Calstrs documents posted on its website—was under discussion for several months as the fund prepared for a scheduled three-year review of how it invests assets for nearly 880,000 active and retired school employees. But the recent volatility around the world has provided a fresh reminder of how exposed Calstrs’ investments are when markets swoon."
Furthermore, as the WSJ points out, the question is now that the market appears to have topped out (at least until the next QE), what will be the proper distribution between stocks and bonds in a typical pension fund portfolio.
Pension funds across the U.S. are wrestling with how much risk to take as they look to fulfill mounting obligations to retirees, and the fortunes of most are still heavily linked with the ebbs and flows of the global markets despite efforts to diversify their investments. State pension plans have nearly three-quarters, or 72%, of their holdings in stocks and bonds, according to Wilshire Consulting.
That number is certain to decline in the coming months.
What is also notable is that while Calstrs’ is at least considering investing in hedge funds, its cousin, the California Public Employees’ Retirement System, decided last year to exit all hedge-fund investments. Other pensions seeking to become more conservative have beefed up stakes in bonds or international stocks. "Calstrs Chief Investment Officer Christopher Ailman said in an interview he hopes the potential shift could help stub out heavy losses during gyrations because the investments don’t generally track as closely with market swings."
Actually they do: if the past few years have shown anything, it is that not only do "hedge" funds not hedge, in broad terms, they are merely highly levered beta chasers, who will gate their LPs at the first sign of abnormal market turbulence. Which is why we wouldn't be surprised if Calstrs ends up reallocating entirely in plain vanilla Treasurys.
As for the punchline, as usual it is saved for last: "Calstrs has not made any major moves in recent weeks amid the turmoil in China and the U.S. markets. Mr. Ailman said he knew there would be turbulence after Asian markets tumbled last month, but he said Calstrs chose to stay put because it views itself as a long-term investor and because its largess means it has limited countermoves when stock prices fall."
Ah, "a long-term investor" - the legendary words every asset managers uses when they have a position that is so underwater, they have no choice but to hold on. Who can possibly forget Norway's sovereign wealth fund which was investing in Greek bonds for "infinity"...
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And while a US pension fund is at least doing the prudent thing, and preparing to rotate out of the riskiest asset just as the market tops out, here comes Japan where things traditionally are upside down, and where we read that with the largest pension fund in the world, the GPIF, having maxed out its allocation "dry powder", another massive pension funds is set to start selling bonds to buy stocks, even as the Nikkei continues to flirt with decade highs. Bloomberg reports:
As the world’s biggest pension fund nears the end of its switch from sovereign bonds into stocks, investors are looking at Japan Post Bank Co. as the next actor big enough to move markets.
The postal lender, the biggest holder of Japanese government bonds after the central bank, sold 5.1 trillion yen ($42 billion) in JGBs in the three months ended June, after offloading a record amount of the debt last fiscal year. The $1.2 trillion Government Pension Investment Fund, known as the whale, said last week stock and fixed-income holdings were all within 3 percentage points of their targets, suggesting it has almost completed a planned shift into riskier assets including global bonds and shares.
The Bank of Japan needs to find about 45 trillion yen in JGBs from the market to meet its annual goal for boosting money supply to stimulate the economy. Japan Post Bank, with 49.2 percent of its 206.5 trillion yen held in domestic debt, fits the profile and needs to seek higher profits ahead of a possible public share sale this year.
The postal bank said in April it plans to increase investments in assets aside from JGBs, such as foreign securities and corporate bonds, by 30 percent to 60 trillion yen in the fiscal year ending March 2018.
Like GPIF, Japan Post Bank has been reducing its dependency on domestic government bonds. The bank owned 101.6 trillion yen in sovereign debt at the end of June, with the ratio falling below 50 percent of holdings for the first time. Unlike GPIF, however, Japan Post Bank hasn’t been increasing domestic stocks. It held just 900 million yen of local equities at the end of the first quarter, unchanged from March.
It will be soon. So good luck Japanese pensioners: nothing screams fiduciary responsibility quite like your asset manager dumping a safe, government backed asset (even if there are 1.1 quadrillion of them) and buying a risky one which is trading at the highest price and valuation since the dot com bubble.
Then again, with Japan's demographic crisis where more adult than infant diapers are sold every year, a little proactive culling of the top-heavy pyramid - courtesy of a few million "so sorry, all your pension funds have vaporized" letter - may be just what the deranged Keynesian doctor ordered.