Just a quick post of an interesting chart we constructed after a night of data crunching. This is preliminary analysis as we still need to look at flows versus valuation effects, and the data should also be viewed with a few caveats. *
The chart illustrates how under allocated the private pension funds sector is to the equity market relative to their historical averages. For example, the sector’s allocation to equities averaged 45% from 1997-2006 and 43% for the 20-year period, 1987-06. The 2Q 2010 data from the Federal Reserve shows an allocation of only 31% to equities. Their most recent allocation to Treasuries is more than three times the 1997-06 average.
Such a large and under invested institutional sector provides the technical fuel and necessary condition for a decent equity rally. It will be difficult for the defined benefit pension plans to fund their liabilities with such paltry bond returns and, out of necessity, will be forced to take more risk.
The sufficient condition for a rally is a story and catalyst. Will a 2.0% 10-year and QE2 be enough? We are leaning that way, but would like to see a 3-5% correction to get longer.
We’ll have more analysis in future posts. Stay tuned!* The data are aggregated and combine defined benefit plans and defined contribution plans, including retirement funds of nonprofits and single-employer and multi-employer plans of for profit firms.