With Steep Market Slide, Schemes Urged to Stay Calm

(August 5, 2011) — Aggravated by fears over eurozone debt and lagging economic growth, global stock markets have tumbled in the past week — but commentators are urging pension schemes to stay calm, making sure they maintain a long-term view and don’t fuel the fire.

“I think there’s a short-term and a long-term realization for institutional investors,” Michael Dunn, Chief Research Officer of TruColor Capital Management, told aiCIO. “Short-term, there’s panic and an instinctive flight to risk-aversion.”

Since July 26, equity markets across the world have lost more than $4.5 trillion in value.

Among the 10 industries in the S&P 500, energy and raw materials declined most steeply, losing more than 5%. Meanwhile, oil dropped 5.8% to $86.63 a barrel.

The dramatic market slide is reportedly instigating speculation that the Federal Reserve will start another stimulus program, while the European Central Bank has resumed bond purchases and offered banks additional cash to thwart the spread of the debt crisis, Bloomberg reported.

“Once you get past the shorter-term risks, institutions need to focus on how they’re going to fund their liabilities in an environment where interest rates will stay low in the foreseeable future,” said Dunn, noting that investors have few alternatives to the returns of equity investing. “Institutions that have cut back on equities will soon have very little choice but to go back to equities because those returns won’t come from any other asset class, so it may be that institutions will be more receptive to new, alternative ways to get that equity exposure,” he added.

Earlier this week, Bill Gross of the Pacific Investment Management Co. (PIMCO) asserted that the US economy is at the ‘tipping point’ of a recession. In an interview with Bloomberg Television, he asserted: “We are at what we call a stall speed, in which corporate profits don’t grow, jobs aren’t created and therefore the economy sinks.” Additionally, Gross said that the debt-ceiling deal is a “Republican Tea Party victory,” following PIMCO co-CEO Mohamed El-Erian’s comments that a debt deal will only bring temporary relief.

The reminder to pension funds to maintain a long-term view in the face of volatility highlights findings from a report released earlier this year by the World Economic Forum, which cautioned on the risks for long-term investors. In a report headed by 19 major pension and private investment funds, the World Economic Forum (WEF) has warned that policy and investor changes are instrumental in driving the growth of long-term investments.

“This report is directly helpful to institutional investors because it will highlight the challenges inherent to long-term investing and makes recommendations how to address them,” Max von Bismarck, director and head of investors of the World Economic Forum and co-author of the report, told aiCIO in March following the release of the report. “We’re trying to understand long-term investors in today’s market, how they differ in their abilities to execute long-term strategies, and what constrains them,” he said, adding that while the need for long-term capital is rising, the ability to make long-term investments is dwindling. According to von Bismarck, the financial crisis has spurred questions about whether short-term objectives of institutional investors have outweighed long-term growth and value creation. “We’ve seen shorter and shorter holding periods as investors face increasing long-term constraints.”

According to von Bismarck, long-term investors are crucial for the global economy, acting as counter-cyclical forces in markets during times of high volatility, solving decaying infrastructure problems around the world, and helping to transition effectively from a high carbon to low carbon economy.

He added: “The financial crisis has raised questions about liabilities, as a lot of funds underestimated their true liabilities under stress. A number of endowments, for example, underestimated the amount they needed to contribute to university budgets and faced a real liquidity crisis, which has pushed all types of funds to review their investment beliefs,” he told aiCIO.