The current asset allocation of major U.S. pension plans now has the lowest percentage of stocks held within investment portfolios over the past 30 years which may mean that an increased allocation to equities may be coming. A shift to a higher percentage of stocks could continue to help the trending stock market and also boost some of the equity asset managers who would get mandates for these new funds. The eventual reallocation of current pension fund assets is a long term trend that will effect the investment landscape for many years.
As of the most recent survey of the asset allocation of U.S. corporate pension plans by Pension and Investments (P&I), the allocation of just 44% of plan assets to stocks is now the lowest percentage in the survey’s history. This most recent survey by P&I during the time period of 2008-2011 also represented the highest allocation on record by pensions to fixed income at 37% of plan assets. Alternative assets also reached the highest level in the survey’s history with 17% of corporate pension plans invested into the alternative asset class which is generally split between private equity, real estate, and hedge fund managers.
Historically, before the most recent survey the average allocation to stocks over the prior 3 survey periods as outlined above was 58%, with a 29% allocation to bonds, a 4% allocation to cash, and a 9% allocation to alternatives. Thus the current allocation to equities is 14% below average with the current allocation to fixed income and alternatives 8% above average respectively.
With 2013 off to a fast start with an ample amount of cash still on the sidelines, as outlined in our article While the stock market is close to a new high the market’s PE ratio is not, we estimate that pension fund allocation will revert back to historical average percentages and boost allocations to equities. As this allocation reverts back to the averages, this shift will be beneficial for the broader stock market as new funds come in and also for leading equity fund managers who would get these new mandates. Investors can capture incremental gains in the broader markets via Vanguard’s Total Stock Market ETF (VTI) and also the iShares S&P 500 ETF (IVV). In addition, the leading equity asset managers who could benefit from increased pension allocation to equities include T Rowe Price (TROW), Invesco (IVZ), and Janus Capital (JNS).