How pension fund money managers manage to play it safe
Safety first. Modest, long-term growth second. That seems to be the investment philosophy of money managers hired by pension funds.
After all, pension fund money is being socked away for employees' retirement years. It is not, therefore, money to be played with. It is money to be protected.
Money managers tend to be more conservative than managers of mutual funds and certainly more prudent than outright stock-market speculators. But within the guidelines of ''safe'' investing lie many options, especially since most larger funds now seek diversity in money managers, choosing according to their areas of specialty.
Some of the managers tout their expertise in real estate; some in international investments; some in safer, high-yield issues; some in aggressive-growth high technology.
Robert G. Wade Jr., president of Bank of America Investment Management in San Francisco, contends that ''asset allocation'' is the specialty that distinguishes his firm.
''The most important decision that a pension fund makes is how to spread its investments,'' Mr. Wade says. ''We think we can add quite a bit of value through our effort to understand stocks versus bonds. That means we have to know how to manage stocks and bonds also.''
Since May, Bank of America Investment Management, with $3 billion in managed assets, has shifted from 80 percent of its assets in equities to 55 percent. Mr. Wade is quick to point out that this does not indicate ''bearishness'' about the stock market, but rather a belief that bonds are offering good returns today (typical maturities: 8 to 10 years). On the equity side, Bank of America Investment Management tends to give relatively more weight to blue-chip technology stocks and consumer stocks.
The AmeriTrust Company bank in Cleveland, on the other hand, specializes in low-multiple stocks. These usually result in significant yield curves, according to senior vice-president Gary W. Queen. This strategy is designed to protect customers from downs in the market, as occurred last year in the hospital-service sector.
At present, AmeriTrust, which manages $3.6 billion in trust assets, has been buying at the out-of-favor, low-risk end of the market, says portfolio officer Richard A. Janus. This includes utilities, financial services (especially insurance), oil, and natural gas. Mr. Janus says the basic approach is not to ''chase market trends,'' but to determine a company's yield potential by analyzing cash flow. On this basis, he says, one attractive industry is now oil.
For most of AmeriTrust's pension accounts, 60 to 65 percent of the assets are in equities (with 5 to 7 percent of those in convertible issues). Cash equivalents (money market funds, in particular) equal another 8 to 10 percent. Around 30 percent are in fixed-income items, usually bonds with maturities of five to seven years.
Boston's State Street Bank manages $7.5 billion in pension fund trust assets, and its forte is international investments. Chief investment officer Lyle H. Davis says larger clients are most interested in his bank's innovative International Index Fund, which tracks - and aggregates - the performance of stock markets in Britain, France, the Netherlands, West Germany, Switzerland, Singapore, Hong Kong, Australia, and Japan.
State Street serves clients ranging from one-person enterprises (usually lawyers or doctors) with pension assets of only $100,000 to clients with more than $1 billion in assets. Among the latter are IBM, AT&T, Xerox, and Exxon; State Street manages a part of these giant pension funds. A typical corporate pension plan would be split between bonds and stocks.
Agreeing that pension funds are ''mostly more conservative'' than mutual funds, Mr. Davis says he and his associates have been leaning toward the bond market lately, believing that pension money and high-yield, high-quality bonds are a good match. Despite their conservatism, however, pension fund managers, like all other money managers, must move into and out of the stock market as they come to new conclusions about the economy. At any one time, says Davis, half of State Street's $7.5 billion will be in money-market accounts and half in conventional investments - bonds, real estate, international stocks, and a variety of US equities.
At Favia, Hill & Associates, bought by New York's Chemical Bank Oct. 1, interest rates are a current concern. Vice-president Robert Hill works with $9 billion in trusts, spread among institutional accounts, endowments, union funds, and corporate pensions. Co-mingling assets for pension funds of below $5 million , for the past year, Favia, Hill has maintained a portfolio of 15 percent cash, 8 percent in a speculative equity fund, 12 percent in an intermediate-type equity fund, and the rest in common stocks and bonds. Mr. Hill says he avoids small stocks and real estate.
At present 30 percent of Favia, Hill's equities are in bonds with an average maturity of 12 years. Stocks make up 58 percent; this is increasing, Mr. Hill notes. Consumer stocks are the largest component at present, and emphasis is being shifted somewhat to papers and steel.
When almost all is said and done, most money managers have similar conservative approaches to investment, observes Peter Woodworth, president of Crocker Investment Management Company. Pension funds choose one over another, he says, based on professional ability and a decision about whether money is channeled into equities, fixed-income instruments, or balanced accounts.
The main investment strategy of Crocker, a subsidiary of Crocker National Bank in San Francisco, Mr. Woodworth says, is to ''invest for growth.'' Policy, therefore, is to choose companies with earnings and dividend growth, although ''we also look for companies undergoing significant change, even those with no real past history.''
With $3 billion in pension and profit-sharing assets, Woodworth emphasizes safety of pension-fund investments by avoiding marginal companies, saying, ''We are certainly risk-averse.'' But volatile stocks, on which the price goes up or down rapidly, are not avoided per se. Says Woodworth: ''We will invest in volatile industries when we think values are right.''
Crocker's approach, he admits, does well in up markets, underperforms the market in down legs, and over a full market cycle ends up being ''above average by most market measurements.'' Having increased equity holdings in synchronization with the stock market boom which began in August 1982, Crocker's portfolio managers recently completed a shift to cover the June-November dip in the market. With a maximum of 75 percent in equities last spring, cash levels were gradually raised over the next few months, from 5 percent to 15 percent. More recently, new stocks were purchased with some of that cash, and now equities are back up to 75 percent.
But such asset allocation, Mr. Woodworth contends, is a ''semimarginal maneuver'' and cannot substitute for careful investments made to achieve long-term growth.