LONDON • If the basic tenet of investing is knowing when to buy and sell, the stock market boom has taken that decision out of the hands of some money managers.
The US$2.9 trillion (RM11.57 trillion) British pension fund industry is yanking money at an accelerated pace as company valuations forge new records globally. The reason is that the gains are triggering sell orders to quickly lock in investment returns, a safety mechanism introduced after the financial crisis to reduce exposure to potential market bubbles and subsequent collapses.
“Triggers are going off constantly,” said Justin Arter, head of BlackRock Inc’s UK institutional client business for the UK, Middle East and Africa in London. He said redemptions are indiscriminate. “There is hardly a week that goes by when a pension fund isn’t redeeming part of their equity portfolio.”
It may be driven by computers rather than humans, but it jibes with what many money managers are worried about. An institutional survey by Natixis Investment Managers found that 64% of UK respondents expect asset bubbles to hurt performance this year.
The bonanza in stocks has been fuelled by low interest rates and a surge in commodity and technology companies. Equity benchmarks from the S&P 500 in the US to the UK’s FTSE 100 and across emerging markets have all set new records in recent months. The global barometer, the MSCI World Index, is up 21% over the past 12 months.
“Triggers take the emotion out of the decision-making,” said Paul McGlone, a partner at Aon Hewitt, a consulting firm that’s a unit of Aon plc. He reckons about half the UK’s roughly 6,000 pension plans have at least one trigger in place versus 30% in 2013.
The mechanisms can be used to monitor asset valuations, bond yields or funding levels of a pension fund in real time. They first became popular about six years ago as technological advancements appealed to pension trustees still reeling from the global bloodbath.
They can help to quickly take profit from an investment or reduce the proportion of a fund invested in a specific asset class. They can also allow a pension fund to dip into the market when bond yields become attractive. Black- Rock said a lot of the money coming out of stocks is going into the private debt market.