Another interesting point made yesterday by Goldman’s (GS) Abby Joseph Cohen (see previous post): Public equity markets may be returning to favor among investors who got burned badly in riskier corners of the market.
The thinking goes that one of the lessons from this crisis is that liquid, transparent assets are worth a premium. Stocks, unlike, say, mortgage securities, private equity, corporate bonds, commercial paper, or real estate, have always been right there to buy and sell (if not short, thanks to the SEC). That alone could make them more attractive once this crisis cools.
A shift back to stocks would be a real reversal by pension funds, college endowments and other big investors who were willing to pay up to move into more exotic corners of the market in search of outsized returns during the boom and are now paying the price as a lot of bad bets in those highly illiquid areas unwind.
Some examples below from the AP:
- Harvard University announced this week that its endowment tumbled since July 1 by about $8 billion, or 22 percent, to about $29 billion, and said that "sobering figure" doesn't fully capture its losses because it doesn't reflect declines in its private-equity and real estate investments. It forecast total losses for its fiscal year ending in June 2009 could be as much as 30 percent, its worst performance on record.
- In California, the public pension fund Calpers says state, local and county governments may have to chip in as much as an additional 4 percent beginning in mid-2010 to cover its pension losses. Its total assets had fallen from $260 billion last fiscal year to just $178 billion on Dec. 1.
- The pension fund for public employees in Wisconsin says it may have to cut monthly payments to retirees by as much as 3.5 percent — the first reduction in its 26-year history. Its Core Fund, a mix of investments including private equity, lost 26 percent from January through October.
Unfortunately, stocks have been (and likely will be) dragged down as all those newfangled strategies continue to go sour. More from the AP on the size of the push into alternative investments:
- The Robert Wood Johnson Foundation, which has more than $10 billion in assets intended to support health care causes, boosted its alternative holdings from 13 percent of its total investments in 2001 to 33 percent in 2007, according to its financial reports. It has not disclosed any recent information about performance.
- Last year, the nation's state and local pension funds put $147 billion into alternative investments, 18 percent more than the year before, according to research by the National Association of State Retirement Administrators.
- Educational endowments put about $144 billion into alternative investments from July 2006 through June 2007, about 8 percent more than the year before, according to Commonfund, which advises and manages money for universities and nonprofits.
So will what's left of those investments eventually make its way back to the dear old Nasdaq and NYSE? Right now, the bulk is probably heading to the even more staid arms of the Treasury market, but in time it's possible that stocks could get some more love.
