click for larger chart



I am putting the finishing touches on a presentation for tonight in Winnipeg and working in the chart above. It comes from Albert Edwards, the London-based global strategist at Société Générale.

I am starting to think the move by institutions away from equities has gone too far”  he writes.

Edwards argues that Pension funds and insurance companies are becoming over-invested in bonds at the expense of stocks. Since 1985, the long term mix between debt and equity has changed, according to Federal Reserve data. Bonds were 34% of assets as of Q3 2012 — that is up from 20% in 2006. Over the same period, Stocks fell to 39% from 61%. (source: David Wilson of Bloomberg)

Similar under exposure exists amongst  UK pension managers (source: UBS Asset Management data). Equities accounted for 75% of UK pension-fund assets in 1999 (UBS data).  Insurers have less than 10% of assets in stocks.

This is, to my way of thinking, a long term bullish factor. Edwards is in agreement with the long term view, but he has shorter term concerns that “stocks are in a bear market — “The Ice Age” — that may bring the lowest prices in a generation.

The bullish counter-argument is that occurred back in March 2009. The counter-counter-argument is that gains are mostly Fed-driven, and history shows those tend to be ephemeral. The counter-counter-counter-argument is that as time elapse, the economy heals, individuals  deleverage, and we get that much closer to the end of the secular bear that began in March 2000.

One last note: “Edwards wrote that the situation is the opposite of what occurred in the late 1990s, when institutions’ focus on stocks made them vulnerable to the market drop that followed.”



Pensions Have Too Much in Bonds to Suit SocGen: Chart of the Day
David Wilson
Bloomberg January 17, 2013

Category: Asset Allocation, Fixed Income/Interest Rates, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “SocGen: Pensions Have Too Many Bonds, Too Few Stocks”

  1. [...] Pension funds have gone too far on the bond front.  (Big Picture) [...]

  2. Ray Dalio says:

    Dalio urges US pension funds to embrace risk parity approach

    Adopting the so-called “risk parity” approach can allow US pension funds, which are desperate to overcome low interest rates and generate returns big enough to pay future retirees, to “lower” the risk in their “overall portfolio’ by “ironically increasing” the risk in their bond holdings, Bridgewater Associates chief Ray Dalio has argued.

    Dalio, who pioneered the idea of using leverage to boost returns of bonds that typically entail a low-risk, low-return profile, told The Wall Street Journal in an interview that risk parity has proved to generate returns in just about any economic condition. Risk parity strategy can involve investments in commodities and Treasury inflation protected securities, derivatives known as TIPS.

    Bridgewater began offering risk parity broadly to clients in 2001 through its All Weather fund. For the trailing 10-year period since September 30, All Weather, which uses leverage of about 2 times, has had an average annual return of about 10%, compared with a median 10-year return for all public pension funds of 6%.

    Other proponents of this strategy include AQR Capital Management and Minneapolis-based investment firm Clifton Group. Echoing Dalio’s views, Michael Mendelson, a principal and portfolio manager at AQR, stressed that it is risky not to use leverage, since this would mean having “huge equity risk’.

  3. ~Everyone talks about ‘Mom &Pop’ “Leaving “Wall St.””..

    “Wall St.” should be, equally(more?), concerned about ‘Institutions’ “going Wholesale”..

    Byline: Kelly Holman

    The names Paul Renaud and Neil Petroff may not resonate on Wall Street in the same manner as Henry Kravis, Leon Black or David Bonderman. Nevertheless, Renaud and Petroff, who run two of Canada’s largest pension plans, may have as powerful an impact on private equity as the trio of leveraged-buyout financiers.

    Renaud and Petroff are circumventing general partners in PE funds by investing money on their own, upending an arrangement between institutional investors and PE funds in place for over four decades.

    Managing their own money could help Renaud and Petroff lower costs and keep more of their profits at the expense of PE firms. Their tactic – if followed by those running other leading pension plans – could be problematic for a private-equity industry that is having a tough time raising money and is still reeling from an economic downturn that sapped many portfolio companies.

    Managers of several U.S. pensions have revealed plans to increase direct investments by serving as co-investors with buyout funds. An official at the California Public Employees’ Retirement System, the largest U.S. pension fund, said in February that it would increase direct investments in companies and rely less on fund managers to invest on its behalf. …”

  4. Concerned Neighbour says:

    I find the following quote laughable:

    “stocks are in a bear market — “The Ice Age” — that may bring the lowest prices in a generation.”

    From where I sit, it is essentially impossible for stocks to go down. In fact, so far this year, has there been a single down day? I can’t recall one.

    Anyone who’s been watching these markets at all closely the last few years knows exactly what’s going on. The Fed, and supporting algos, are firmly in control. We may still call it a market, but it is by no means “free” any longer.

  5. socaljoe says:

    I wonder if the change in the ratio of stocks and bonds is simply a reflection of the price changes of these assets as opposed to actual sales of stocks and purchases of bonds. It seems to me that if a portfolio of stocks and bonds were simply held, with no purchases or sales, the ratio chart would look something like the one above.

  6. CANDollar says:

    Thanks for the post – we do not pay enough attention to what pension funds are doing.

    Re: Winnipeg presentation, its minus 26 today! It gets colder – a spilled coffee can turn to ice before it hits the ground some winter days in the Peg.

  7. Joe Friday says:

    Edwards: ‘I am starting to think the move by institutions away from equities has gone too far’.

    Which ignores the fact that treasuries have outperformed equities over the past 5-year, 10-year, 20-year, and 30-year horizons.

    Sure, if you keep putting money on 27 Black, it will EVENTUALLY come up, but in the mean time….

  8. xatta says:

    Maybe I”m just tired but, dang, that chart reminds me of … a whale!

  9. gloeschi says:

    agree with socaljoe. Charts like these are of limited value; what is performance impact, what is flow (new assets channeled into bonds instead of equities)?

  10. Rightline says:

    A breakdown of the mutual fund assets would be helpful. Assuming 2/3 of the mutual funds were in stocks would put the pensions at above 70% equity from 1999-2008. If they would have rebalanced, the overreaction flight to bonds that is sticking (so far) may not have occurred.

  11. This is why the bull market in stocks may have long legs.

  12. TheJudge says:

    Barry — how are “mutual funds” in this chart invested? Is this money markets/cash or some sort of alternative investment strategy? Also, the total comes out to be approx 90% out of 100% — 40 + 35 + 15 — where are the remaining 10% of assets invested? Cash/alts/PE/RE? Thanks.

  13. OldNative says:

    I wonder to what extent the results reflect the phase-out of defined benefit plans in favor of defined contribution plans coupled with the demographics of the remaining defined benefit participants.

  14. brianinla says:

    Wall St. Greed is limitless. They would love to take more money from retirees funds. Then the fund manager goes back to the retirees and says they have to cut your check because the returns weren’t there.

  15. godot10 says:

    Shouldn’t pension funds have 5% of assets in gold as insurance against financial system collapse.

    Pension funds may be underweight stocks, but they are grossly underweight gold.

  16. DRR says:

    This is about the thirteenth “time to move into stocks” article I’ve read today. Did everyone at Davos secretly agree to use their media powers to pump stocks? Maybe Bernanke has privately stated that when he leaves the Fed in Feb 2014 that the new guy will have cover to raise rates. Gotta think the smart money will be selling at this year at the top…

  17. ben22 says:

    I have the same question as Rightline…how much of those mutual funds are in stocks versus the amount of the mf’s in bonds

  18. Any discussion about pension funds and bond allocation is entirely incomplete without discussing LDI (Liability-Driven Investing). As someone who run’s a large pension plan, I can tell you that the driving force behind a higher bond allocation is a focus on matching your assets to your liabilities (in terms of duration).

    Pension funds are not in the business of generating returns, they are in the business of paying their liabilities.