Mark to Market Leads to Greater Investment From Overseas

The Financial Times reports that tougher regulation and the push for mark-to-market accounting have caused domestic pension fund managers to shift away from equities and other riskier investments. Because populations are growing older, this migration was inevitable.  However it was anticipated to occur at a more moderate pace.

For example, in the UK, domestic pension funds and life assurers have reduced their share of the UK equity market to 25-30 percent. In the U.S. the pool of pension money is so vast, it takes very little diversification by Americans to have a big impact on the securities market.

The question is whether the shift to bonds is significant. Foreign investors are moving into securities as domestic investors leave. There is reason to be concerned when a country becomes heavily dependent on foreign equity flows: Overseas investors tend to be less committed owners than domestic institutions, and foreign investors are more likely to move in a herd. The Financial Times worries, “When they make for the exit, it can be destabilising [sic] for currencies as well as stock markets.”

Regulations have consequences. Let’s keep this in mind as we reconfigure the U.S. markets.