After a Poor Decade, Institutional Investors Move Away From Equities

(August 20, 2009) – In response to poor equity returns over the past decade, large institutional investors from across the globe are cutting exposure to this staple asset class, data shows.

With stock returns lagging behind those of bonds by 8.6% since 1999 (according to a study by the London Business School and Credit Suisse), some – but clearly not all – institutional investors are cutting equity exposure. According to data from Bloomberg, four of the world’s seven largest pension funds have cut their equity exposure modestly, with the California Public Employees Retirement System (CalPERS) – a bellwether of American institutional investing – cutting holdings from 56% to 49%. Other large funds that made similar moves include Dutch-based ABP (from 32% to 29%) and the Korean National Pension (from 17% to 15%).

British institutional investors have been particularly spooked by the poor performance of equities. According to data complied by Citigroup, equity holdings account for just 41% of British institutional portfolios, their lowest point since 1974. This figure exceeds bond holdings by just 1.6%, the smallest gap since 1962. The trend seems likely to continue: Up to 33% of UK pension funds plan on cutting equity exposure, according to a recent study by Watson Wyatt. Only 2% plan on increasing it.

The reason for this exodus? “The real issue is they don’t want the volatility they had,” Louise Kay, the head of UK institutional business development at Standard Life Investments told Bloomberg. “Funds normally have to look whether they rebalance or not after one asset class loses value, and this time they are wondering whether this is the right thing to do.”

Not everyone is running from the stock market, of course. The New York Common Fund is holding its allocation at 51%, while the government pensions of Norway and Japan – two massive capital pools – are holding steady on their equity exposure.

While moves out of poorly performing asset classes will rarely get managers fired, historical trends show that this past winter – namely, low price-to-earnings rations on many global stocks – might not have been the most opportune time to exit the market. While hindsight is always 20/20, investors who fled the stock market will have missed a bull run of proportions unseen since the 1930s.