| LONDON, June 13
LONDON, June 13 Just as a month-long stock
market rout seems to have further trashed the concept of a
"Great Rotation" from bonds into equities, evidence is emerging
that institutional investors may have already begun such a
A strategic re-allocation back to higher-return stocks from
safe-haven but low-yielding bonds has been touted as one of the
biggest investment themes of 2013.
That theory has been doubly challenged - by the stocks
sell-off since the Federal Reserve raised the question of how
long it can keep its cash taps open, and by the lack of hard
evidence of a shift out of bonds. (link.reuters.com/tyj88t)
Until now, the available data showed the flows driving
stocks have come out of money markets, not fixed income.
So the latest data from the Fed offers probably the first
significant evidence that a meaningful bonds-to-stocks shift at
least began in the first quarter among U.S. pension funds.
The Fed data showed U.S. pension funds and insurance
companies bought $13 billion of equities and sold $10 billion of
bonds overall in a move driven by private pension funds. (link.reuters.com/jej88t)
While this switch may be small, it helped boost the equity
weightings of U.S. pension funds and insurance companies - a $25
trillion industry - to 45 percent at the end of the first
quarter, the highest level since 2007, according to JP Morgan.
This suggests that a secular switch back to equities among
investors such as pension funds may have been supporting the
asset class through the reappraisal of Fed policy intentions.
"People are realising the value equities are bringing
relative to bonds right now - you see that in equity risk
premium or in earnings yields," said Grant Bowers, portfolio
manager at Franklin Equity Group.
"Great rotation is something that is going to play out in
the next 5-10 years. It's not something that is going to play
out overnight. It's going to be a slow tailwind behind equity
markets. There's a lot of buying power on the sidelines."
Even after the shakeout in stocks, this year's total return
in equities still far outpaces that of other asset classes.
Compared with an 8 percent gain in the MSCI All-Country
equity index, benchmark U.S. Treasuries
lost 2.2 percent and corporate bonds fell 1 percent.
Equity risk premium - which measures how much investors are
being compensated for buying equities over risk-free government
securities - stands at around 6-7 percent for U.S. stocks,
nearly double the 110-year average, according to Credit Suisse.
Data from Bank of America Merrill Lynch shows bond funds had
an outflow of $14.5 billion in the week ending Wednesday, the
second largest on record. Less money flew out of equity funds,
at $8.5 billion.
Pension funds and insurers are making an important shift in
strategy after they spent five years offloading equities to
reduce risks highlighted by the global financial crisis.
As they increased safe but low-yielding bonds, their funding
holes grew wider and they are under pressure to plug the gap
with stocks that offer the prospect of higher returns.
Moves by some of the world's biggest institutional investors
add weight to the talk of an institutional move out of bonds.
Norway's sovereign wealth fund, which has always been a
strong buyer of stocks, has 62.4 percent of its portfolio in
equity holdings, near a record high, while its bond weighting
had fallen to a record low of 36.7 percent as of end-March.
Japan's public pension fund (GPIF), the world's largest with
a pool of $1.1 trillion, announced last week it is increasing
its Japanese stocks allocation to 12 percent of its portfolio
from 11 percent, while lowering its weighting in domestic
government debt to 60 percent from 67 percent.
This may be only the beginning. For GPIF to eventually have
the bond-weighting of Norway, it would have to pull 27 trillion
yen ($272 billion) from the Japanese government bond market.
That would be more than half the amount of additional JGBs
that the Bank of Japan has pledged to buy this year under its
At the same time, GPIF would have to invest another 45
trillion yen ($454 billion) in equities to match the portfolio
of international peers such as Norway.
"In the institutional world, we would concur there are
tentative signs," said Alan Higgins, chief investment officer at
private bank Coutts.
"Equities are under-owned at institutions. They are
rebuilding. You are likely to see more of this over time."
(Editing by Ruth Pitchford/Catherine Evans)