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The head of one of the largest pension schemes in the US says it is planning to cut back investments in equity markets, in the latest sign that rising interest rates have brought an end to the “Tina” era that drove the past decade of stock price gains.
Steven Meier, chief investment officer for the $250bn New York City Retirement System, said rising interest rates “changes the dynamic in terms of what you need to invest in — you really don’t need to have as much equity exposure now”.
Rock-bottom interest rates, first introduced in response to the 2008 financial crisis and which reappeared during the coronavirus pandemic, created a mantra among many investors that “There Is No Alternative” to stocks, with even traditionally cautious money managers such as pension funds forced into riskier assets in search of returns as bond yields tumbled.
However, interest rate rises across the developed world have caused what Meier described as a “dramatic repricing” in fixed-income markets. The yield on what are in effect “risk-free” two-year US Treasury notes has risen from a low of 0.1 per cent in 2021 to 5.1 per cent this week, while high-yield debt is paying an average of 8.8 per cent, according to the Ice BofA high-yield index.
“My hope is we don’t go back to zero-interest rate policy any time soon if ever because I think it does provide some level of disruption in the marketplace, and suboptimal decisions getting made based on the fact there is free money in the market,” Meier said in an interview with the Financial Times. “I think the repricing in 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 would vary across the funds, but he expected to see a reduction in the proportion 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 about 65 per cent of its portfolio in public and private equities. At the end of 2022, around 31 per cent of its funds — $73bn — were invested in public fixed income, down from 35 per cent at the end of 2018.
The change in approach echoes recent statements from big money managers such as BlackRock, which declared 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.
NYCRS’ $250bn of assets puts it roughly level with the New York State Common Retirement Fund and behind only California’s Calpers and Calstrs among the country’s largest public pension funds.
Meier said he also expected to increase NYCRS’ investments in private equity, even as many other institutions are looking to reduce their exposure to the sector.
He said NYCRS had not become overexposed because of local laws limiting how much it can put into certain asset classes, and the withdrawal of other institutions could create more opportunities.
“If I’m a private equity firm, I don’t want clients that are here today, gone tomorrow and back in three years — you want to see a consistent relationship,” Meier said. “When volatility picks up in public markets it spills over into the private asset sector . . . it’s the right time to continue to buy assets, provided you have enough liquidity in your portfolio.”
