Corporate Pension Risk Minimization Is Going to Become Increasingly Inefficient, Says JPM Strategist

Corporate pensions are now nearly 100% funded, meaning that their strategies may need to change.


Corporate pensions are better funded than ever, according to a new study released by JP Morgan. The data shows that the top 100 corporate pensions in the United States have finally surpassed the average funded levels achieved pre-2008. The average top-100 corporate plan today is 96.4% funded. Currently, over 70% of the plans studied were at their highest-funded levels ever since the Great Recession.

But the strategies that work for bridging a funding gap are not necessarily appropriate for better funded plans, says Jared Gross, co-author (with Michael Buchenholz) of the study and head of institutional portfolio strategy at JP Morgan.

“We’ve been in an era of gradual but persistent de-risking for the better part of the last 12 to 15 years,” says Gross. “But now that we’ve arrived at a level of funding that gives people more flexibility, it’s useful to step back and consider just how far they should go.”

Gross says that while the old models of asset allocation based on total return maximization did not work, newer models that focus heavily on liability-driven investing are also inefficient.

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“The idea that a plan should be invested almost entirely in duration matched corporate bonds and should not seek any excess return is also outdated,” says Gross. “We are arriving at a point now where risk minimization is going to become increasingly inefficient.”

Gross says that given rising wage inflation, it’s particularly useful if plan sponsors look for assets that offer some degree of inflation compensation like real estate, timber, and alternatives.

“There are many plans that still have populations of active workers, so it may be that inflation is going to be a bigger part of the liability going forward,” says Gross. “If your portfolio is entirely invested in fixed income, you are not going to keep pace with that.”

Gross also notes that 2021 was the first year since 2013 in which both asset returns and actuarial returns operated to the benefit of plan sponsors.

“That sort of situation doesn’t come around very often,” says Gross. “While that usually is a good time to take off some risk, there are other far more interesting ways to reduce risks within the return-seeking portfolio rather than pushing capital further into long duration fixed income that also preserve some degree of outperformance.”

Gross also says that there is a misconception among some plan sponsors that pension surpluses are not useful.

“There is this kind of folklore in the pension community that pension surpluses are nothing more than a trapped asset on the balance sheet that will ultimately be captured by excise taxes,” says Gross. “There’s no truth to that at all.”

Gross says that surpluses can be an important cushion against pension volatility. They can also be important for plan sponsors that want to merge plans or do a 420 transfer, a process in which excess assets are transferred to retiree health accounts.

“Just reaching 100% funding is not really the endpoint that most plans should aspire to,” says Gross.

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Oil Is the New Sin Stock, and That’s a Boost for the Sector, BCA Says

Some investors may be bailing out of their energy shares, but tobacco and its ilk show that can be a perverse plus.



Is investing in oil stocks a sin? If so, these energy shares are in good, and lucrative, company.  

A BCA Research report finds that investing in oil is acquiring, at least in some circles, a risqué allure. And it has helped keep up oil companies’ share prices.

Classic sin stocks are alcohol, tobacco, gambling, cannabis, and firearms. BCA calculates that they have outperformed the broad market in the U.S. by 28% over 50 years. At the same time, quoting a 2017 academic study, these indecent equities are 8% cheaper compared to the rest of the market, as measured by their price/earnings ratios.

Another advantage for sin stocks is that heavy government regulation has erected high barriers to entry, limiting competition and propelling consolidation.

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Many of those attributes are true to oil companies. While frackers have become a presence in the oilfield, the majors still command the most capital, allowing them a lot of leeway. Even before the energy disruptions wrought by Russia’s invasion of Ukraine, the majors had been dialing back their capital spending, even while demand surged.

Sure enough, they have scored good earnings of late, and their stocks are soaring. Exxon Mobile is up 43% this year and Chevon 45%. It doesn’t hurt that their price/earnings ratios are affordable, with Exxon at 16 and Chevron at 21. The S&P 500’s P/E is 25.

A 2021 report by Gold­man Sachs showed that market concentration for oil producers tripled from 2018 to 2020, versus the 2010 to 2014 period. The oil firms “now stand at levels consistent with an oligopoly,” the BCA report says.

BCA also quotes Cliff Asness, founder of AQR, on sin stocks’ bad-boy allure: “How does the market get anyone, perhaps particularly a sinner, to own more of something? Well, it pays them! In this case through a higher expected return on the segment in question.”

BCA notes that climate-minded divesting has prompted numerous institutional investors to ditch oil stocks. The report observes that “what is undeniable is that the combination of divestment and the challenging environment of oil have given an attractive discount to energy stocks.”

The study adds that “oil is not tobacco,” in that the economy needs the energy that petroleum generates, and that’s hardly true of cigarettes.

For investors, the extra enticement of naughtiness may be a nice propellant for oil shares, now and in the future.

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Black Gold Indeed: Oil Finally Seems Poised to Hit $100

 

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