Investment Strategy – Sell Fixed Income

Pension Funds Buying Fixed Income

As investors and business owners, it is problematic to make decisions for the future with too much of an emphasis on the past. In reading a recent issue of Grant’s Interest Rate Observer, they mentioned an eye-popping statistic from the 2012 Milliman Pension Funding Study: pension funds are now, in a time of record high fixed income prices, allocating more of their portfolio to fixed income (41.4%) than to equities (38.1%). It almost seems that they are buying fixed income because the prices are super high, rather than buying something where the price to value ratio is a bit more favorable.

Sell High, Buy Low

In fact, pension funds and individual investors have a terrible habit of investing in asset classes as the prices are at their highest (think fixed income today or housing in 2007). This reminded me of the 1970’s when Warren Buffett was buying public equities like crazy, but pension fund managers only allocated 21% to equities in 1974 and 1977, and only 9% in 1978. These years were wonderful years to buy public equities.

On the other hand, pension fund managers allocated a record 122% of net funds available in equities in 1971, a time of very high equity prices.

An Opposite Investment Strategy

These numbers suggest doing the opposite from pension fund managers. So today, sell fixed income at these high prices and please do not buy. Whether today is the right time to buy public equities generally, I do not hazard a guess (give me a particular company, however, and I may be willing to offer an opinion). I do believe it continues to be a nice time to own private companies that can adapt to a changing environment as the economy, politics, and global trends change over time.