The Equity Exodus

A few days ago, I was reading an article regarding a shift that is occuring within the world of institutional investing. For those that don't know, institutional investors are entities such as pension funds, endowments, and trusts where large pools of money are invested with a stated goal (e.g. employee retirement contributions are invested to provide future retirement income in the case of pension funds).

Anyway, the article discussed how there's increasing evidence that institutional money was shifting away from equities and into fixed income markets. Up until the financial crisis, the opposite trend was occuring. Investors like institutions that generally bought more stable products were safer. However, because of the outsize returns that were being seen in the stock markets, and the growing obligations many of these institutions were facing, many increased their stock exposure in the chase of the proverbial carrot.

Well, as I'm sure you've realized already, those outsize returns disappeared in a huge hurry, and many institutional got burned just as severely as individuals. Now it looks like the money is shifting back the other way.

So What?

I think the shift away from stocks to safer alternatives is particularly interesting for several reasons. First, I think this will definitely have an impact on the markets. These institutions literally have trillions of dollars to manage, and moving just a tiny fraction won't go unnoticed. More specifically, I think that as this trend continues, stock markets will become more volatile and have at least some downward pressure. This is because institutions tend to be more longer term investors and don't trade in and out as quickly, so having that kind of money in the market provides stability to the investment. Stocks will lose this stability and it will likely move to bonds (although I should note, many institutions also invest in alternative assets and hedge funds which often have shorter duration investments).

Uncle Sam Likes This Too?

Another interesting point along these lines is how this impacts government spending. A lot has been said recently about the so-called 'bond bubble'. There has been huge demand for the relative safety of bonds, particularly treasuries, and many investors think bonds have become over-valued. Nonetheless, Uncle Sam loves this, because he is able to issue more and more bonds for fairly cheap prices (he only has to pay 2.56% on a 10 year bond right now!). Although values have gone up significantly, I think this shift from institutional investors may lend credence to the theory that bond prices have more room to go up, or at least are not going to come crashing down.

Too Late to the Party?

Now let's flip this around again. Yes the inflow of institutional money into the bond market would provide support for bond prices. However, there's been a huge runup in bond prices over the last couple of years. I do agree that they will provide stability to these institutions. However, I do question the timing of the move. If there is a significant recovery in the economy, these funds can easily get burned.


The apparent reallocation of institutional assets from equities is likely to have a sizable impact on the markets. Although it is not yet obvious, I think stock prices could be adversely affected with this trend and we will see more volatility in the equity markets.