Friday, March 19, 2010

Consensus Views (cont.)

Earlier this week I went to an asset gathering conference hosted by the brokerage firm UBS.

It was a good chance for me to hear from a number of leading firms and industry experts.

What I was struck by, however, was the overwhelming consensus of the "correct" investing strategy at this point in the market. Everyone, it seems, is fleeing stocks (especially US stocks) in favor of bonds and alternative investments. And everyone "knows" that interest rates are heading significantly higher, and so are keeping their portfolios structured accordingly.

As several of my previous posts have indicated, I believe that you rarely are successful in investing when you follow the consensus.

So when I think that stocks in the US can move higher, and interest rates lower, I recognize that this is a minority view, which gives me another reason to believe that events should unfold as I anticipate.

With that background, here's a report on pension investing from Merrill Lynch. Their survey work is in line with what I heard earlier this week (I have added the highlighting):

Volatility reduction on the mind…

Currently, we see a significant overall desire to reduce surplus volatility within
corporate pension plans. This will typically be achieved by the continuing sale of
equities and buying of bonds. In fact, the desire is so strong, major consulting
firms are building entire teams focused on liability driven investing (LDI) and asset
managers are prepping sales and marketing to be ready for the push.

…but rate triggers will ultimately determine moves

However, the belief among many larger plan sponsors that rates should rise is
having the most profound effect on delaying implementation. Many large plan
sponsors are on the sidelines waiting for rates to rise and are prepping
implementation when interest rate triggers are met. We believe when a plan
sponsor is comfortable and their rate trigger has been met they will begin a
meaningful shift away from equities into long-duration fixed income securities.

Forecasts imply increasing long-end rates…

Nearly every rate forecaster in Bloomberg’s current rate forecast survey believes
we should see increasing long-end (10- and 30-yr) Treasury rates in the future.
So overall, while the need to hedge surplus risk among plan sponsors seems
widespread, the timing of a sizable duration extension is tactical. Many plan
fiduciaries are holding off on an extension in the belief that interest rates will rise.

…but if history is any guide tend to overestimate

For the past nine years the median Wall Street forecasters had overestimated
forecasts by 80bp on average. Perhaps, these forecasters will be proven correct,
but that is a rather large gamble for plan fiduciaries to take. Plan sponsors may
find hedging alternatives in the options market as an ideal way to protect against
downside rate moves in the near term.