UK pension funds sell stocks as market triggers bubble warning

LONDON: If the basic tenet of investing is knowing when to buy and sell, the stock market boom has taken that decision out of the hands of some money managers.

The US$2.9 trillion British pension fund industry is yanking money at an accelerated pace as company valuations forge new records globally. The reason is that the gains are triggering sell orders to quickly lock in investment returns, a safety mechanism introduced after the financial crisis to reduce exposure to potential market bubbles and subsequent collapses.

“Triggers are going off constantly,” said Justin Arter, head of BlackRock Inc’s UK institutional client business for the UK, Middle East and Africa in London. He said redemptions are indiscriminate. “There is hardly a week that goes by when a pension fund isn’t redeeming part of their equity portfolio.”

It may be driven by computers rather than humans, but it jibes with what many money managers are worried about. An institutional survey by Natixis Investment Managers found that 64% of UK respondents expect asset bubbles to hurt performance this year.

The bonanza in stocks has been fueled by low interest rates and a surge in commodity and technology companies. Equity benchmarks from the S&P 500 in the United States to the UK’s FTSE 100 and across emerging markets have all set new records in recent months. The global barometer, the MSCI World Index, is up 21% over the past 12 months.

It can be very hard for a trustee who has just experienced a bull market to say ‘let’s pull the plug and de-risk’. It’s easier to say let’s carry on. Paul McGlone

“Triggers take the emotion out of the decision making,” said Paul McGlone, a partner at Aon Hewitt, a consulting firm that’s a unit of Aon Plc. He reckons about half the UK’s roughly 6,000 pension plans have at least one trigger in place versus 30% in 2013.

“It can be very hard for a trustee who has just experienced a bull market to say ‘let’s pull the plug and de-risk.’ It’s easier to say let’s carry on,” he said.

The mechanisms can be used to monitor asset valuations, bond yields or funding levels of a pension fund in real time. They first became popular about six years ago as technological advancements appealed to pension trustees still reeling from the global bloodbath.

They can help to quickly take profit from an investment or reduce the proportion of a fund invested in a specific asset class.

They can also allow a pension fund to dip into the market when bond yields become attractive. BlackRock said a lot of the money coming out of stocks is going into the private debt market.

Companies overseeing pension funds declined to give specific examples of stocks or industries that had risen to the point where a manager was obliged to sell.

What’s clear is that the triggers are precipitating a couple of key investment trends for the pension industry.

While there is still roughly US$1.3 trillion of UK pension money invested in stocks around the world, managers have been cutting their holdings for years in favor of what used to be known as alternative investments: hedge funds, property and even things like ships and highways.

It also raises another challenge for fund managers battling to protect market share from cheaper passive products that track indexes automatically. — Bloomberg