The $1bn Maryland-based Black and Decker retirement fund for US employees is currently riding the wave of the US stock market with a 50% asset allocation to US equities, a weighting it has sustained for the past eight years.
The fund currently has around 14,000 active participants (32,000 participants in total) and with a 28% allocation to US bonds and about $30m in alternative investments, add this on to the equity weighting, and one can see the plan is placing a heavy reliance on the performance of the domestic markets.
This is not of dramatic concern to Patricia Haverland, director of pensions investments at Black and Decker however, as she still views the US markets as holding a fair amount of potential, despite the fact that the recent outperformance cannot continue ad infinitum.
I think it's becoming more volatile at this point and it's no secret that more and more pundits are concerned about valuation levels," she admits, but adds: "but many people were concerned about valuation levels a year ago and two years ago, and if one followed their sage advice one would have missed out on a 50% return in the last 12 months!"
It is in this vein that the fund draws its investment philosophy. It avoids market timing and allocates for the long term. "What we try to do is to make sure our perspective is very long term, as our liabilities are very long term, and not try to guess which way the markets are going to go," says Haverland.
"When the temptation comes and we think the market is stretched, that's why we have a policy so you can't try and top the market, because not too many people have proven themselves to be good market timers."
Every three years the plan brings in its consultants to carry out a "full-blown" asset liability study to review the asset allocation and reset target policy if necessary. On a monthly basis the internal team reviews the plan's weightings. "If it gets outside of a plus or minus 5% of our target policy then we will rebalance to our target policy," says Haverland.
The equity weighting is based on the Wilshire 5000 benchmark and the plan uses large cap growth, large cap value, small cap growth and small cap value managers. And the plan has no strategic plans as yet to alter the asset allocation less in the US market's favour, though as policy dictates money would be withdrawn from the market when deemed necessary. "If we're moving up close and 55% would be our rebalancing point, we would take money out of US equities and re-allocate it to those asset classes which are under their benchmark," she explains.
In the short term however, the plan is content to stay put. "I think valuations may be stretched but I still think there are securities out there that are of reasonable value." For the bond market, while the plan currently holds slightly below it's policy weighting of 30% in US bonds, Haverland also maintains fairly high confidence levels in the market. "I think it's relatively stable. I"m not a prognosticator on interest rates but I think we could have moderate movement either way." Rachel Oliver"