A Look at Pension Plan Allocations
Thursday, October 3, 2013
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 37.8%, up 1.8 points
  Neutral: 32.1%, down 1.2 points
  Bearish: 30.1%, down 0.5 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »

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Click here to see the full agenda and to register.

Recent data from the U.S. Census Bureau gave an updated look at how the largest 100 public-employee pensions are allocating their investments. It is an interesting report because, like a retired investor, a pension has to contend with income distributions and longer-than-expected life-spans. A pension also shares characteristics with an investor who is still employed full-time and faces both future liabilities (meaning money for living expenses) and the need to achieve enough growth to meet those liabilities.

At the end of the second quarter of 2013, corporate stocks (which include private equity, venture capital and leveraged buyouts) accounted for 34.4% of total cash and securities holdings. International securities comprised 20.1% of public-employee pensions. Corporate bonds had an 11.1% allocation. A 9.1% allocation was assigned to federal government securities.

You might notice the exclusion of approximately one-quarter of the pension portfolios’ allocation. The summary document I am using does not specifically break out the percentage of pension assets held in cash. Due to the government shutdown, the Census Bureau’s website is blocking access to statistical data, making the details unavailable. I can say that, based on the numbers above, cash accounts for no more than a 25% weighting.

What is notable about the allocations is that even in the current environment, pensions have significant exposure to both stocks and bonds. The equity component provides growth to overcome the risk of inflation. The bond component provides income and diversification. It’s an important mix because pensions have to balance both current and future liabilities.

Granted, there are several public pensions that lack the assets to meet their future obligations. For both public and private pensions, this more often reflects underfunding and return assumptions that were too optimistic. Individuals face the same potential problems. Failing to save enough and counting on too high a level of returns leads to inadequate savings. (Bad investment choices on the part of pension investment committees and individual investors are also a cause of inadequate portfolio balances.)

What may not be immediately apparent from the data is the total return approach followed. Pensions and endowments do not adhere to the “never touch principal” philosophy. Rather, they look to their entire portfolio to fund distributions. This focus on total return allows them to take advantage of what the market gives them, as opposed to trying to fit a square peg into a round hole. Focusing on total return works for pensions and endowments, which have regular distribution requirements, and it works for retirees depending on their portfolios for income too.

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The Week Ahead

Third-quarter earnings season officially starts with 10 members of the S&P 500 reporting. Included in this group are Alcoa (AA) and Yum! Brands (YUM) on Tuesday, Costco Wholesale Corp. (COST) on Wednesday, and Wells Fargo & Co. (WFC) and Dow component JPMorgan Chase (JPM) on Friday.

What economic data we will actually see will depend on how long the government is shut down. The September jobs data scheduled for release tomorrow (October 4, 2013) will not be published until the shutdown ends. Next week, August international trade (Tuesday), August wholesale trade (Wednesday), September import and export prices (Thursday), the September Producer Price Index (Friday), September retail sales (Friday) and August business inventories (Friday) could all be delayed. It looks like the weekly initial jobless claims data will be released on Thursday even if the shutdown continues, but I’m not certain. Not impacted by the shutdown will be the release of the minutes from the September Federal Open Market Committee meeting (Wednesday) and the preliminary October University of Michigan consumer confidence survey.

The Treasury Department will auction $30 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year notes on Thursday. These auctions will occur even if the government remains shut down.

Four Federal Reserve officials will make public appearances. Cleveland president Sandra Pianalto and Philadelphia president Charles Plosser will speak on Tuesday. St. Louis president James Bullard and San Francisco president John Williams will speak on Thursday.

I will be participating in a Wall Street Journal webcast on Monday discussing investing tips for those near retirement. You can RSVP and submit questions by clicking here.

AAII Sentiment Survey

Bullish sentiment rose slightly in the latest AAII Sentiment Survey after plunging last week. Neutral sentiment and bearish sentiment declined modestly.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 1.8 percentage points to 37.8%. This is the seventh time in the past 10 weeks optimism is below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, declined 1.2 percentage points to 32.1%. Even with the decline, this is the 22nd time in the past 28 weeks neutral sentiment is above its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, slipped by 0.5 percentage points to 30.1%. The historical average is 30.5%.

As the numbers show, there was not much change in individual investors’ short-term outlook for stock prices. Rather, the current positive events—the market’s rally, growth in corporate earnings and sustained economic expansion—are being partially offset by the negative events—slow economic expansion, Washington politics, and stock valuations.

This week’s special question asked AAII members what, if any, portfolio actions they have taken or postponed because of the federal budget and debt ceiling fights. (The government shutdown started late in the survey’s polling period, which runs from Thursday through Wednesday.) The majority of respondents (57%) said they have not made any changes. Some said they don’t make investment decisions in reaction to politics, while a few others cited prevailing stock valuations. A sizeable minority (26%) said they have either increased their cash positions or postponed buying stocks until they have greater certainty or a pullback in stock prices occurs.
Here is a sampling of the responses:

  • “None. There is always some potential disaster lurking. If I ran from danger every time, I’d never be in the market.”
  • “I am not affected by that nonsense. Good companies are still good companies.”
  • “I have not taken any actions. The government will eventually agree on spending and debt limits.”
  • “I’m building my cash position to take advantage of potential buying opportunities.”
  • “None, but I’ll be taking action at the ballot box on the fools that are out to wreck the economy.”

» Take the sentiment survey

AAII Asset Allocation Survey

September Asset Allocation Survey results:
Stocks/Stock Funds:
    64.5%, up 2.2 points
Bonds/Bond Funds:
    16.0%, down 1.2 points
    19.6%, down 0.9 points

Asset Allocation Survey details:
    32.9%, up 2.5 points
Stock Funds:
    31.6%, down 0.3 points
    3.7%, down 0.1 points
Bond Funds:
    12.3%, down 1.1 points

Take the survey »

Bond and bond fund allocations declined to a four-year low in the September AAII Asset Allocation Survey. Equity allocations rose, but remained within the recent range.

Stock and stock fund allocations increased by 2.2 percentage points to 64.5%. The increase was largely a reversal of August’s decline and kept equity allocations within the range that has held throughout most of this year. September was the sixth consecutive month and the eighth out of the past nine months with stock and stock fund allocations above their historical average of 60%.

Bond and bond fund allocations declined 1.2 percentage points to 16.0%. This is the smallest allocation to fixed income since May 2009. It also ended a streak of 50 consecutive months with bond and bond fund allocations above their historical average of 16%.

Cash allocations declined by 0.9 percentage points to 19.6%. September was the sixth month in the past nine months with a cash allocation reading below 20%. September was also the 22nd consecutive month with cash allocations below their historical average of 24%.

Since yields on the 10-year U.S. Treasury note began to rise in early May, fixed-income allocations have fallen by a cumulative 3.7%. The April 2013 survey showed a 19.7% allocation to bonds and bond funds. At the same time, this year’s strong rally in stock prices has increased stock allocations for those investors who have not actively altered their portfolios.

Many individual investors continue to express uncertainty. Prevailing stock valuations, the Federal Open Market Committee's decision to postpone tapering its bond purchases and a lack of key progress by Congress and the president are all influencing AAII members' sentiment towards stocks and bonds.

This month’s special question asked AAII members for their thoughts about the rise in Treasury yields that has occurred since May. There was no clear consensus, though the largest number of respondents (26%) said they expected an increase in yields to occur at some point. An additional 11% expect interest rates to continue rising. Approximately 7% thought the extent of the increase was either unjustified or an overreaction whereas 6% said interest rates are still too low.

» Take the Asset Allocation Survey