(September 23, 2013) — A publically listed company with a huge pension deficit should be avoided by investors at all costs, right? Not always, analysts at Goldman Sachs Asset Management have said.
The bank-backed asset management firm tracks a basket of Europe-listed companies with the largest pension deficits and reported that—in July at least—they had been outperforming their peers with relatively healthy funding levels.
The performance of these 50 companies in the STOXX Europe 600 has closely followed the rise in German bond yields, which had been rising steadily since May. GSAM said it expected these companies to continue to rise on this basis, should the German 10-year bund take the same line.
The theory is that as bond yields begin to rise, and with the eventual loosening of quantitative easing around the world this is likely to occur, liabilities will be reeled in. This should mean deficits are also lessened and corporates should see smaller pension black holes on their balance sheets.
GSAM said the impact of these deficits on the companies—or rather their duty to pour in cash should they get any worse—had already been adjusted in the pricing of these stocks, meaning they were cheaper than their peers in the same business. This affect had lessened in the recent past, GSAM said, but the analysts stuck to the basic premise, using the 12 month price-to-earnings forecast to show these companies were still set to trade at a discount.
The asset manager advised investors that many of the stocks in the basket were classed as “cyclical” and they were dominated by UK companies, due to the nature of the country’s benefit system.
Use ticker GSSTPENS to track the basket on Bloomberg.
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