The Decline of Stock Market Investments

In a shift of investment strategy, the head of one of the largest pension schemes in the US has announced plans to reduce investments in stock markets. This move comes as rising interest rates have marked the end of the era of consistent stock price gains.

Steven Meier, chief investment officer for New York City’s $250 billion pension system, believes that the changing interest rate environment calls for a reassessment of equity exposure. He emphasizes that there is no longer a need to heavily invest in stocks.

The Era of Low Interest Rates

For the past decade, low interest rates have compelled investors to prioritize stocks as there appeared to be no alternative. With bond yields plummeting, pension funds and other money managers were forced to seek higher returns from riskier assets.

However, the recent hikes in interest rates have led to a dramatic repricing in fixed-income markets, causing a significant shift in the investment landscape. The yield on “risk-free” two-year US Treasuries has risen from a low of 0.1% to an impressive 5.1%, while high-yield debt now offers an average return of 8.8%, according to the Ice BofA High Yield Index.

The Repricing of Fixed Income

The repricing of fixed income, according to Meier, has been a healthy and necessary adjustment. He believes that the era of zero interest rate policy should not return, as it distorts the market and leads to suboptimal decision-making. The recent changes in fixed-income markets have provided an opportunity to reassess long-term asset allocations.

Reviewing Asset Allocations

NYCRS, which manages the pension funds for New York City employees, is currently reviewing its asset allocations. While the final decisions may vary across the different funds, Meier expects a reduction in equity investments and an increase in fixed income, high-yield bonds, and private assets such as private credit and infrastructure.

A Changing Investment Landscape

The change in approach by NYCRS reflects the sentiments of many other big fund managers, including BlackRock, which has highlighted the return of income in the midst of higher interest rates and macroeconomic volatility.

With $250 billion in assets, NYCRS is one of the largest public pension funds in the US. The pension scheme plans to increase its investments in private equity, even as other institutions are looking to reduce exposure to this sector.

Opportunities in Private Equity

Meier notes that the limitations imposed by local laws have prevented NYCRS from becoming overly invested in certain asset classes. He sees the withdrawal of other institutions from private equity as an opportunity to establish consistent and long-term relationships with private equity firms.

In Meier’s opinion, the current market volatility in public markets spills over into the private asset sector. He believes that now is the right time to continue buying assets, as long as there is sufficient liquidity available in the portfolio.

A Shift in Investment Strategies

The changing landscape of pensions investments marks the end of the era of heavy reliance on stock markets and the necessity for riskier assets due to low interest rates. Pension funds like NYCRS are reassessing their investment strategies to align with the new dynamics.

As interest rates rise, fixed income investments become more attractive, providing a healthier investment environment. Furthermore, the focus on private equity presents promising opportunities for long-term growth and stability, as other institutions reduce their exposure to this sector.

Summary

The head of one of the largest pension schemes in the US, Steven Meier, has announced plans to reduce investments in stock markets amidst rising interest rates. The era of low interest rates led to a heavy reliance on stocks, but the recent hike in interest rates has prompted a reassessment of investment strategies.

The repricing of fixed income has been seen as a healthy adjustment, with higher yields offering attractive returns compared to the low rates observed in the past decade. NYCRS is reviewing its asset allocations, anticipating a decrease in equity exposure and an increase in fixed income, high-yield bonds, and private assets.

This shift in investment strategy reflects the sentiments of other big fund managers, as income takes center stage in a new era of higher interest rates and macroeconomic volatility. While other institutions are reducing their exposure to private equity, NYCRS sees this as an opportunity for long-term partnerships with private equity firms.

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The head of one of the largest pension schemes in the US says he is planning to cut back on investment in stock markets, in the latest sign that rising interest rates have ended the ‘Tina’ era that ruled the last decade of the stock price gains.

Steven Meier, chief investment officer for New York City’s $250 billion pension system, said rising interest rates “it changes the dynamic in terms of what you have to invest in – you really don’t need to have that much equity exposure now.”

Low interest rates, first introduced in response to the 2008 financial crisis and reappearing during the coronavirus pandemic, have created a mantra among many investors that “There is no alternative” to stocks, with money managers also traditionally cautious like pension funds forced to buy riskier assets in search of yield as bond yields plummeted.

However, interest rate hikes across the developed world have caused what Meier described as a “dramatic repricing” in fixed-income markets. The yield on “risk-free” two-year US Treasuries rose from a low of 0.1% in 2021 to 5.1% this weekwhile high-yield debt pays 8.8% on average, according to the Ice BofA High Yield Index.

“My hope is that we don’t go back to zero interest rate policy anytime soon, if at all, because I think it provides some level of disruption in the market and sub-optimal decisions are made based on the fact that there is free money in the market. market,” Meier said in an interview with the Financial Times. “I think the repricing of fixed income has been healthy.”

NYCRS, which includes five separate funds for different groups of city employees, is reviewing its long-term asset allocations. Meier said the final results will vary between funds, but he expects a reduction in the percentage of assets invested in equities and an increase in fixed income, high-yield bonds and private assets, including private credit and infrastructure.

NYRCS currently aims to invest approximately 65% ​​of its portfolio in public and private equity. At the end of 2022, about 31% of its funds – $73 billion – were invested in public fixed income, down from 35% at the end of 2018.

The change in approach echoes recent statements from big fund managers like BlackRock, which said in its mid-year review late last month that “income is back” as the world enters a new long-term regime of higher interest rates and macroeconomic volatility.

The NYCRS’s $250 billion in assets place it roughly on par with the New York State Common Pension Fund and behind only California’s Calpers and Calstrs among the largest public pension funds in the country.

Meier said he also expects NYCRS to increase its investments in private equity, even as many other institutions are looking to reduce their exposure to the sector.

He said the NYCRS has not become overweight due to local laws limiting how much it can invest in certain asset classes, and that the withdrawal of other institutions could create more opportunities.

“If I’m a private equity firm, I don’t want clients who are here today, leave tomorrow and come back in three years. You want to see a consistent relationship,” Meier said. “When volatility increases in public markets, it spills over into the private asset sector. . . now is the right time to continue buying assets, provided you have enough liquidity in your portfolio.”