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Why Is Big Business Dumping Stocks?

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For long-term growth, owning stocks has historically been the thing for investors to do. Yet even in the face of what many believe is a bond market bubble, many of America's largest companies are moving their own pension money out of stocks and into bonds and other assets. Should you do the same?

A long trend
Granted, after the move upward that the stock market has made over the past year, you might think that corporations would be prudent to reduce their stock market exposure. After all, an 80% move higher in the S&P is unlikely to repeat itself anytime soon.

But actually, the trend toward reduced stock exposure in pension plans has been going on for some time. Now, new disclosure rules give us a close-up view of what individual companies are doing, and the lessons they're teaching may be valuable for your own investing.

Investing for everyone's retirement
Yesterday, I wrote about a report from Goldman Sachs that examined the dire situation many companies find their pension plans in. The market meltdown in 2008 caused many pension plans to become underfunded, and even with 2009's gains, many still find themselves with fewer assets than they are projected to need to cover their pension obligations.

One of the more interesting issues raised by the report has to do with pension plans' future prospects. Companies now have to tell shareholders and employees more about exactly how they invest their pension assets, and that gives us a window into how some of the biggest investing institutions in the country manage their money.

Overall, pension funds have moved away from the stock market in recent years. Since 2004, the overall asset allocation to stocks among pension funds has dropped from 64% to just 45% in 2009. Bond allocations have risen somewhat, but more of the money moving out of stocks has gone into the "other" classification, which may include alternative investments such as hedge funds and private equity. Although hedge funds largely fell out of favor during the market meltdown, investors have reportedly started moving money back into such funds as the financial markets have recovered.

Big difference
However, there are huge differences among the approaches that different pension funds take.

Johnson & Johnson (NYSE: JNJ  ) and Caterpillar (NYSE: CAT  ) , for instance, stick to a traditional stock-heavy asset allocation. Both companies have more than 70% of their assets in stocks, versus just 24% in bonds. One reason why both companies took a more aggressive approach toward their investing may be that each pension fund was severely underfunded at the end of 2008. Their big stock position helped them close the funding gap dramatically last year.

In contrast, some companies have virtually eliminated their stock exposure. Prudential Financial (NYSE: PRU  ) has a whopping 74% of its assets invested in bonds, versus just 13% in stocks. Sara Lee (NYSE: SLE  ) has a 63% to 24% stock/bond split. Both companies had fairly well-funded pensions, although both saw their funding status deteriorate somewhat during 2009.

Yet it's important not to overstate the importance of the figures these companies are reporting. Assets that fall into the "other" category often have risk levels that are comparable to equities, and so from a risk standpoint, pension funds with substantial investments in alternative investments may well have a similar risk exposure to funds with higher allocations to stocks. For instance, timber specialist Weyerhaeuser (NYSE: WY  ) put almost all of its assets in the "other" camp, reflecting an unusual comfort level with nontraditional investments. 3M (NYSE: MMM  ) and Eli Lilly (NYSE: LLY  ) also had heavy concentrations of 40% or more, well over the average of 17%.

You shouldn't conclude that just because their stock allocations are low, a pension fund is playing it safe. Because each company has different needs, resources, and philosophies, you're going to see wide variations in the way they invest their pension money.

A guideline to follow?
So should you follow the lead of pension funds? Most investors don't have the same access to private equity and hedge funds that pension funds do, so stocks are often the best vehicle to take greater risks in an effort to maximize return. Moreover, while profitable companies have greater latitude to take short-term hits by diverting extra money into their pensions, most people can't change their retirement savings as easily.

If you can afford to contribute more toward your retirement, then reducing risk levels is a viable alternative. But if you're already saving as much as you can, keeping your stock allocation relatively high is a good way to seek out better performance -- if you have a long enough time horizon to ride out any bumps in the road.

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Fool contributor Dan Caplinger moves his stock money around, but rarely out. He doesn't own shares of the companies mentioned in this article. 3M is a Motley Fool Inside Value choice. Motley Fool Options has recommended buying calls on Johnson & Johnson, which is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy shows Big Business who's boss.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 05, 2010, at 11:07 AM, JAlexandratos wrote:

    Even if you have access to alternative investments like hedge funds and private equity partnerships, that does not mean you should put your money into them. Returns after ridiculous fees (e.g. hedge: 2% of gross plus 20% of returns!), transaction costs, and capital gains taxes are not any better than even broadly diversified low cost index funds and they are more volatile. These investments are less transparent than stocks or mutual funds by law, so published information is likely biased towards the positive, making them even worse investments. See Allan Roth's article at http://moneywatch.bnet.com/investing/blog/irrational-investo... for a better analysis.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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