Financial Investment News published a piece centered on how investors are reacting to the markets and what adjustments they're making amidst the uncertainty. It includes quotes from Kevin Leonard on potential scenarios he sees during the pandemic. Read on FIN News here.
Institutional investors have spent the week outlining the potential ways the markets could move going forward as the COVID-19 pandemic continues to play out across the country and world.
“Volatility overall is the main theme here,” Consultant Peter Lemek of general investment consultant Aon Hewitt Investment Consulting told the $291 million Metropolitan St. Louis Sewer District Employees’ Pension Plan at its March 31 finance committee. “We’ve seen volatility continue; it’s come down a little bit over the past few trading days, however, volatility remains a pretty significant factor within markets.”
He said the focus is on the appropriate time to make a move in equities.
“So we’re still determining when is the best time to move back to equities. We are, as best practice, making sure you all continue to be investing within your policy allocations, so making sure you all don’t fall outside of the allowable ranges, as dictated by the investment policy,” he said.
Keith Reynolds, v.p. and senior consultant at Segal Marco Advisors, told the $344 million City of Hollywood (Fla.) General Employees Retirement System at its March 31 meeting that he believes the plan should modestly rebalance back into equities over time to stay within targets.
“We do feel like buying back into equities over the coming months when equities are depressed is good, buying low and over time you hope to sell high,” Reynolds said.
Reynolds added that there are likely to be more up and down days in what he called an “emotional market” and that the firm is in a wait-and-see position with the markets until volatility subsides.
“We are not recommending that right now just because of the extreme volatility of plus and minus 10% days that continue. What we are looking at right now is waiting for some of that volatility to subside,” Reynolds said.
Doug Anderson, a senior consultant at AndCo Consulting, told the $297 million Employees’ Retirement System of Tulsa County (Okla.) at its March 31 board meeting that there are opportunities in rebalancing.
“Study shows that traditionally in environments like this, when you are looking for the equity markets to move the cheapest part of the portfolio is [the] small-cap, mid-cap portfolio,” he said. “I’m not saying to put all of [the money] in there, but let’s be smart about this. I like the cheap market exposure of the index funds…I would encourage thinking about reallocating to international equity…the U.S. is going to lead the way out of this crisis, but I think that some of those other countries…there are some opportunities there. Those are the three main areas I’m thinking about allocating to.”
Daryn Miller, cio of the $4.5 billion Kern County (Calif.) Employees Retirement Association, also discussed rebalancing with the board at its April 1 board meeting.
“We’re taking a patient approach toward fully rebalancing back into equities and then I think as we get through fully moving through this crisis and once we have a full understanding of really what valuations look like, what growth looks like, there’s an opportunity to actually take our equity allocation slightly above target because at that point we should have pretty attractive valuations and a better opportunity set for equities going forward. I know that with the board we have had a conversation a number of times regarding our equity risk level and is it too low? And I think the response from both myself and [Verus Executive Managing Director] Scott [Whalen] has pretty consistently been that we don’t think now is the time to increase our equity risk. I think on the backside of this crisis it may not be the time to jump our equity risk, equity exposure, and so that’s something we’ll be thinking about.”
NEPC Partner Kevin Leonard discussed the firm’s outlook on the coronavirus situation at the $470 million New Castle County (Del.) Employees Pension Program’s April 1 board meeting.
Specifically, he noted that the firm is trying to assess three potential scenarios for how the crisis could play out in terms of its effect on the markets, with the first scenario being a short recession.
“Everybody has to agree we are already in or will be entering into a recession, so the question is—is this going to be a short recession, or like we saw with the global financial crisis, or something worse?” Leonard said.
While he admitted that it’s “too early in the game” to make any hard projections, a shorter recession, while a possibility, is “probably unlikely at this point.”
“Even if social distancing restrictions are somewhat lifted, there has been a lot of damage to small businesses, even though there was significant movement through both the fed and government to fend off this, money hasn’t come close to funneling down to the points in the economy where it needs to,” he said.
The second scenario would be “something like we experienced during the global financial crisis,” and while NEPC views that crisis and the coronavirus crisis as two completely different situations, the “economic impact could be measured similarly,” Leonard said.
The third scenario, which would be the worst-case scenario, involves the recession becoming “extreme” and depression-era-like, he explained.
For now, NEPC is stressing to its clients the importance of liquidity and that it “should be the number one priority,” he said.
In terms of the future, Leonard said that “the key to how low this can go and what a recovery can look like is how soon life can get somewhat back to normal.”
Real estate was also discussed at several of the meetings.
Anderson told the Tulsa County plan that now is a timely entry point for its real estate investments.
“The people that can invest today especially in this core-plus type marketplace…You think equity investors are the only ones that sell when the markets go down, real estate folks sometimes they get overleveraged and that creates opportunities as well. That is a direction I would like go to also,” he said.
The plan began investing in real estate for the first time in 2019 and hired core-plus managers PGIM Real Estate and Principal Global Investors to split a 5% maiden allocation (fin|daily, 7/29).
Aon’s Lemek also noted that there may be opportunities ahead for real estate.
“On a real estate side, what looks more interesting right now is potentially public markets, so think REIT securities—publicly traded real estate securities,” he said. “There seems to be a huge disconnect between where they’re trading at and the underlying NAV, so our group Townsend [Group] is on top of that.”
Lemek reiterated that it’s still too early to tell what opportunities may be in private markets, but mentioned that “as anyone might expect, it’s probably going to be distressed credit-oriented; whether it’s private equity, real estate or liquid alternatives.”
“Certain areas of the market, it’s still too early, so I’m thinking private real estate, private credit or private equity, areas where we haven’t even gotten year-end valuations in yet,” he said. “But it’s just too early to tell what opportunities might present themselves there.”
Kern County’s Miller is also looking for strategies that are positioned to take advantage of the market dislocation.
“The initial wave of the sell-off was one that markets really became dislocated and there was trade that just didn’t make sense,” he said. “An example of that is Treasuries and U.S. government securities, there’s something called on-the-run and there’s something called off-the-run securities. Really the difference there is just Treasuries that are being issued by the government now versus treasuries that were issued months and years ago. The spread between those two securities, which really should trade right on top of each other, really widened out massively and there’s really no logical reason for that. It’s a situation that could be arbitrage and there’s examples [of] that throughout the markets, which came in in the middle of March. So we’re looking to deploy money into strategies that can take advantage of some of those dislocations.”
He also added that the staff is looking at add money to high-yield fixed-income.
“We’re looking to really be specific and focused where we’re deploying capital, not necessarily making directional calls, but where there’s dislocations that we think don’t make sense in the market. Could some of these things not work out? Yes, that’s the nature of investing. But we think these are the right risks to be taking right now during the process,” he said.