When equities become an ATM

Many global institutional investors including pension funds are being forced to use their equity portfolios as automatic teller machines because of their inability or reluctance to sell tradable securities at an appropriate price, according to the chief executive of Bank of New York Mellon Transition Management, Mark Keleher.

Keleher said last year’s historic sell-off in equity markets, combined with modest gains in the broad fixed income index, had pushed the portfolio allocations of institutional investors far from their targets.

He said many portfolios contained fixed income securities that were difficult to value or were currently untradeable and this was creating problems for investors trying to rebalance by selling bonds and buying equities.

“The illiquidity has had a major negative impact on the cash flow of pension plans, endowment, and foundation investors who must meet ongoing obligations to beneficiaries,” Keleher said. “Investors have been forced to sell their most liquid investments — liquid equities — because they refused to accept fire sale offers for their fixed income portfolios.”

He said one of the approaches being encouraged by his company was an overlay strategy that had the starting point of comparing the costs involved in the traditional approach of swapping physical assets with an overlay program using futures.