US Pension Funds Sell Stocks and Buy Bonds... "420 Trillion Won Sold"

Turning to US Treasuries amid high interest rates
Major pension funds consecutively lower target stock allocations

According to the Wall Street Journal (WSJ) on the 18th (local time), US pension funds that have made huge profits amid the recent US stock market boom are realizing gains by selling their holdings.

According to the report, CalPERS (California Public Employees' Retirement System), the largest public pension fund in the US, plans to sell stocks worth about $25 billion and invest in bonds and private equity funds. Last month, it lowered the target stock allocation in its portfolio from 42% to 37%. CalPERS recorded the highest performance among major pension funds in 2021 with a 21.3% return.

[Image source=Reuters Yonhap News]

The New York State Common Retirement Fund, which manages $260 billion for police officers, firefighters, and other public workers, also adjusted its target stock allocation from 47% to 39%. US corporate pension managers are also reported to be abandoning aggressive investment styles by reducing the proportion of stocks in their overall investments to less than a quarter.

Riding this trend, Goldman Sachs forecasted that US pension funds, which sold $191 billion worth of stocks last year, will dispose of stocks worth $325 billion (about 420 trillion won) this year. Timothy Bryde, co-head of Goldman Sachs Multi-Asset Solutions, said, "Moving away from stocks is a good sign for the long-term soundness of the pension system." According to Federal Reserve (Fed) data, the total pension funds of US state governments (including local governments) and corporate workers reached about $9 trillion (about 1,200 quadrillion won) as of the end of last year.

WSJ pointed to the US's high interest rate policy as the cause of this phenomenon. With the yield on the US 10-year Treasury bond, considered a representative safe asset, reaching the 4.5% range, investors are turning to the bond market, which can generate considerable returns without taking risks, unlike stocks. Zorast Wadia, senior actuary at US insurance consulting firm Milliman, explained, "No pension fund wants to cling to stocks that can fall at any time and give back hard-earned profits."

Concerns about the overvaluation of US stocks are also interpreted as influencing pension funds' decisions to shift their positions. According to global data analytics firm FactSet, the stocks of companies in the S&P 500 are currently trading at about 24 times their earnings per share over the past 12 months. This exceeds the 5-year average of 22 times. Marcus Frampton, chief investment officer of the Alaska Permanent Fund Corporation (APFC), said, "Stock prices are too high compared to corporate earnings," adding, "Bad things can happen in a very expensive stock market."

Meanwhile, on the 17th, the three major indices on the New York Stock Exchange all closed lower. This is interpreted as a burden on tech stocks after Fed Chair Jerome Powell effectively hinted at a delay in interest rate cuts the previous day. The S&P 500 index has risen about 5.3% so far this year.