LONDON, July 12 (Reuters) - While investors are still scrambling to get on board the shiniest new mega-trends and what seems like a runaway stock market, a slower-moving juggernaut from the past could well cut across the equity fast lane.
One of the biggest supercycles of all - the course of nearly $40 trillion of U.S. retirement savings and its glacial shifts - is creeping back on the radar for some long-term strategists just as indiscriminate, passive stock index plays looks to many like the only vehicle in town.
A bias to passive equity due to the multi-decade shift from "defined benefit" (DB) pensions, where employers or government take the risk in guaranteeing stable salary-linked income after retirement, to "defined contribution" (DC), where the onus is on workers to save and ensure their own retirement income, may now be fading.
That's no bolt from the blue - but it's a flag for savers hogging record-high stock index holdings and considering the years ahead.
To be sure, talk of headwinds to U.S. and global equity indexes that have loaded another 20% to 30% of gains over the past year is hardly a popular take right now.
Mid-year updates from global asset managers suggest the artificial intelligence boom may only be in its infancy, green investment opportunities are building, economic and earnings growth is still humming and all against a backdrop of falling interest rates.
Active managers parse the hotspots and laggards of course. Ever-patient "value managers" still pray for some rotation to better-priced smaller stocks, sectors or countries.
But for most savers, relatively cheap equity index trackers - even though flattered by big tech megacaps adding twice those index gains over the past 12 months and single-stock treblings of AI plays like Nvidia - have proven to be low-hanging fruit.
And while handwringing over the influence of handful of megacaps abounds, that equity performance is only partly explained by such concentration - at least in the United States.
The equal-weighted S&P 500 that adjusts for the influence of outsize stock leaders has indeed lagged the main index over the past 10 years - but it has still doubled over the decade and beaten global benchmarks to boot.
'DIY PENSIONS'
What then of the pensions' influence?
JPMorgan's long-term investment seers Jan Loeys and Alexander Wise took a deep dive and posited the 50-year shift in pensions provisions from once dominant DB to DC schemes has been a significant boon to risk-taking and equity exposure - and it's a trend that is hitting its high watermark.
Replicated to differing degrees around the world, U.S. statistics show an almost 9-1 split in participants in DC over DB schemes now compared to equal pegging 40 years ago.
Initially popular due to easy switching from job to job and with more discretion in how much and where to save, the DC "DIY pension" has left savers prone to the vagaries of the market and a structural need to accumulate more money for retirement than pooled DB schemes. And that's simply seen savers seek higher-returning investments than more conservative DB funds to maximize retirement nesteggs.
For some 20 years, DC schemes have held more equity than equivalent DB funds - with stock holdings up rising by more than 10 percentage points as a share of those plans over that time to more than 60% now, compared to less than 40% held in DB.
But greater freedom in how much to save has led to increasingly inadequate DC savings on aggregate - in turn prompting regulators to seek ways to bolt in more participation and to ease access to lifetime annuities from insurers that then translate DC pools to reliable income when working life ends.
"We thus expect to see a secular rise in the demand for simple lifetime annuities, indexed to inflation, that will boost the demand for credit and inflation-linked bonds products that backstop these annuities," wrote Loeys and Wise. "This should be one factor...that is likely to induce U.S. investors to reduce some of their record-high allocations to equities."
Corporate bonds being higher-yielding now than they have been for more than a decade only amplifies that, they reckon.
SUNSET FOR DC FLOWS
In an analysis of the preference for passive equity index investing, GMO strategists Ben Inker and John Pease also touched on the DC versus DB debate in their quarterly letter this week.
Inker and Pease reckon the move to DC schemes has encouraged passive equity index investment over active fund managers - in part due to sponsors seeing less of risk being sued for underperformance. What's more, this preference seemed oblivious to changes in relative valuations and may have smothered relative market shifts.
"As it is incredibly difficult to successfully sue over being placed in a cheap passive index fund, it is little surprise that the overwhelming direction of flow in the defined contribution space is to passive strategies," they said, adding these then were just automatically directed to shift over time with employee age through "target date" funds.
And this, they say, reduces the efficiency of markets in accurately pricing new information as passive target date funds by construction wholly disregard relative shifts in real bond yields or equity valuations themselves, with allocations barely changed over 10 years despite in shifts in equity risk premia.
Like Wise and Loeys, they warn of a sunset for this flow.
"The transition to defined contribution is coming to an end," the GMO team concluded, pointing out that U.S. DB plans and annuities have already gone from making up 82% of retirement assets in 1974 to just 37% last year.
"While passive may continue to grow as a fraction of assets outside the pension arena, the profound incentive shift that occurs when assets move from defined benefit to defined contribution is absent."
While neither of these arguments strictly counters the near-term equity bullishness of so many mid-year outlooks, it may challenge the sometimes heretical assumption that equity indexes remain your friend forever.
After that, timing - and perhaps age - may be everything.
Opinions expressed here are those of the author, a columnist for Reuters.
(Editing by Jamie Freed)
