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The head of one of the largest pension schemes in the US has announced plans to reduce investments in equity markets, signaling the end of the “Tina” era that fueled the past decade of stock price gains, due to rising interest rates.
Steven Meier, the chief investment officer for the $250bn New York City Retirement System, stated that higher interest rates have changed the investment landscape, reducing the need for as much equity exposure.
The introduction of rock-bottom interest rates following the 2008 financial crisis, and their reappearance during the pandemic, led many investors to believe that stocks were the only option. Even traditionally cautious money managers, such as pension funds, were forced to take on riskier assets in search of returns as bond yields declined.
However, interest rate hikes across the developed world have resulted in a “dramatic repricing” in fixed-income markets. The yield on “risk-free” two-year US Treasury notes has risen from 0.1% in 2021 to 5.1% this week, while high-yield debt is now paying an average of 8.8%, according to the Ice BofA high-yield index.
Meier expressed his hope that zero-interest rate policies will not return anytime soon, as he believes they disrupt the marketplace and lead to suboptimal decision-making based on the availability of free money. He views the repricing in fixed income as a healthy development.
The New York City Retirement System is currently reviewing its long-term asset allocations. While the final results may vary across the funds, Meier anticipates a decrease in equity investments and an increase in fixed income, high-yield bonds, and private assets such as private credit and infrastructure.
Currently, the system aims to invest approximately 65% of its portfolio in public and private equities. At the end of 2022, around 31% of its funds ($73bn) were invested in public fixed income, down from 35% in 2018.
The change in investment strategy aligns with recent statements from major asset managers like BlackRock, who emphasized the return of income in their mid-year review. They predict a new era of higher interest rates and macroeconomic volatility.
The New York City Retirement System’s $250bn in assets places it on par with the New York State Common Retirement Fund and trailing only California’s Calpers and Calstrs among the largest public pension funds in the US.
Meier expects to increase the system’s investments in private equity, even as other institutions seek to reduce their exposure to this sector. He believes that limitations imposed by local laws in terms of asset class allocations have prevented overexposure. Additionally, the potential withdrawal of other institutions opens up more opportunities for NYCRS.
According to Meier, public market volatility spills over into the private asset sector. Therefore, he considers the current period favorable for acquiring assets, as long as there is sufficient liquidity in the portfolio.
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