During the big market declines of recent weeks, many of the biggest investors have been buying stocks. But that may not signal a belief that the market is about to soar.
Instead of selling into a downdraft, as some individual investors appeared to be doing, many major institutions -- including government and corporate pension funds, university endowments, charitable foundations, and religious organizations -- have been compelled by ironclad asset allocation policies to do the reverse. The policies require them to buy stocks when the market knocks the value of their equity positions below a desired level -- say, 60 percent of total assets.
"It's been our experience that institutional investors weren't part of the sell-off," said Roger Fenningdorf, a principal at Rocaton Investment Advisors, a Darien, Connecticut, consultant to institutions. "I don't think our clients are happy about what's happened to the markets in recent months, but they haven't been panicking, and they aren't giving up on their asset allocation policies."
This methodical buying, or "rebalancing," by institutions to adhere to asset allocation goals has helped fuel some of the periodic comebacks in the stock market in recent weeks.
"With things in the markets changing as dramatically as they have, we have tended to rebalance by buying stocks and selling bonds," said William F. Quinn, the president of AMR Investment Services, the unit of AMR, the parent of American Airlines, that manages corporate pension assets.
Michael Flaherman, the chairman of the investment committee for the California Public Employees' Retirement System the nation's largest pension plan, said, "When we buy stocks, it's not because we are looking at the market and saying, `It's the right time.' It's because we are looking at our asset allocation targets."
Some professionals say individual investors, who tend to be less resolute in forming or keeping asset allocation targets, might do well to adopt such goals, too.
"Institutional investors know that you have to have patience and you have to have a plan, and you have to stick with it," said Gail L. Bardin, a principal at Hotchkis & Wiley Capital Management, a Los Angeles-based institutional money manager focusing on value stocks. By contrast, the behavior of many individual investors has appeared to be anything but methodical.
Judging from mutual fund outflows over the last two months, many people were selling stocks priced much closer to their cyclical lows than to their highs. In June, net redemptions for equity mutual funds totaled US$10.46 billion, after five consecutive months of inflows, according to AMG Data Services, which tracks fund flows. In the first 25 days of July, the cash outflows totaled US$30.6 billion, dwarfing the US$23.6 billion withdrawn from funds in the month after Sept. 11.
To be sure, some people who sold their stock holdings were nearing retirement or had other needs for money and therefore could not afford to take the chance that equity values would fall further. By contrast, institutions have the benefit of investing truly for the long term.
While some institutions have put some money into hedge funds, such moves have generally been limited to a small proportion of their investments.
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