Pension funds and insurance companies are at risk of investing too much money in bonds at the expense of stocks, according to Albert Edwards, a global strategist at Societe Generale SA.
The CHART OF THE DAY shows how the mix between debt and equity has changed for U.S. company funds since 1985, according to data compiled by the Federal Reserve. Bonds were 34 percent of assets as of Sept. 30, up from 20 percent six years earlier. Stocks fell to 39 percent from 61 percent in the same period.
U.K. pension managers have made a comparable change in asset allocation, according to data from UBS Asset Management that Edwards cited in a report two days ago. Many insurers have less than 10 percent of assets in stocks, he wrote.
Lower share prices may accelerate the switch into bonds, the report said, by prompting regulators, consultants and plan sponsors to push investors toward holdings seen as less risky. Edwards repeated his stance that stocks are in a bear market, which he calls “The Ice Age,” that may bring the lowest prices in a generation.
“I am starting to think the move by institutions away from equities has gone too far,” the London-based strategist wrote. Managers might eventually get caught in a bond-market decline tied to central-bank easing and miss out on gains in stocks, he said.
Edwards wrote that the situation is the opposite of the late 1990s, when institutions’ focus on stocks made them vulnerable to the market drop that followed. Equities accounted for 75 percent of U.K. pension-fund assets in 1999, according to the UBS data.
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