Pensions may miss the Great Rotation


As some conclude that a Great Rotation is inevitable, you might think that this is great news for public pensions. These funds face some significant challenges in terms of future returns that will allow them to keep pace with future liabilities.

Unfortunately, there's a chance as of now that these funds will miss out on the start of the rotation, if it is truly underway. P&I notes that the rotation "back into equities from bonds is unlikely to be seen in 2013 among most defined benefit pension funds in major markets…In addition, while many pension funds are moving out of investment-grade bonds, alternative asset classes, like hedge funds, real estate and private equity, are a more popular destination than traditional long-only equities."

The reality is that the politics of public pensions are such that many are still seen as carrying too much risk. Consider the plight of CalSTRS.

"In 2012, global equities accounted for 51% of CalSTRS' total assets compared to 60% in 2007. Fixed income decreased to 18% from 21% of the portfolio during the same period. CalSTRS is currently conducting an asset allocation review, which is expected to be completed in the second quarter," according to P&I.

Pension officials say that "if we do shift assets out of fixed income due to the historic risk, they will likely wind up elsewhere other than equities."

This could prove costly from a returns point of view, this. One big issue is where funds will end up if the industry rotates out of bonds. The big winners may be alternative investments, some of which will be heavy on stocks.

All in all, if there is a lot of upside to equities right now, it would be a shame if public pensions were to miss out on that directly.

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