A bold bet on rising rates lifted a small Massachusetts fund near the top of the performance rankings
5 min
Plymouth County is known for Pilgrims, cranberries—and a top-performing pension fund run by a 65-year-old former schoolteacher.
After a decade of mostly ho-hum performance, the $1.4 billion Plymouth County Retirement Association ranked in the top 10% of U.S. pensions over the past three years. Key to that success was an early—and prescient—bet that interest rates would rise. That buoyed the fund through big chunks of the past two years, when climbing rates hammered both stocks and bonds.
Now markets of all kinds have posted a six-month rally , stocks are hitting records and Plymouth risks falling behind again. But Peter Manning, the fund’s director of investments, is sticking to his guns. The hope that rates will fall soon is misplaced, he said. Another downturn could be coming for Wall Street.
And so, to Manning, the best way to enlarge the pension long term is by avoiding big losses, rather than chasing high returns.
“It ain’t about what you make. It’s about what you keep,” he said.
The fund, which manages savings for the county’s firefighters, bus drivers and custodians, delivered average annual net returns of 5.7% in the three years ending Dec. 31. That put it ahead of 92% of pensions nationally. The median U.S. public retirement fund returned 3.7% over the same period, according to Investment Metrics, a portfolio analysis provider.
Plymouth County surpassed bigger peers by slashing exposure to Treasurys and public stocks before they tanked in 2022. The fund then reinvested the money in infrastructure, private equity and inflation-protected debt.
While many other public plans have followed suit , the trades were also unusually quick for pension funds, which often change investments incrementally rather than in bold strokes.
“A lot of our clients made moves on the margin,” said Daniel Dynan, a managing principal at Meketa Investment Group, Plymouth County’s investment consultant. “The difference in Plymouth is the magnitude of the change.”
With only 10,500 members, the fund is an unlikely trendsetter. U.S. public pensions guarantee retirement and benefit payments to 34 million members nationally, according to data from the Urban Institute, a nonprofit think tank. Plymouth County, which lies south of Boston, encompasses mostly middle-class suburbs, but also some wealthy enclaves and gritty urban areas. It is split between Democratic and Republican voters.
A decade ago, Plymouth County had only about half of the money it needed to make expected payments for its retirees. An accounting change in 2012 drastically widened shortfalls for most public pensions across the country.
At the same time, the board overseeing the fund, which had spent years relying solely on an outside consultant, was dissatisfied with its investment performance. The approach resembled the classic mix of 60% stocks and 40% bonds popular with ordinary investors.
“We were doing what everyone else was doing, running a 60-40 portfolio and hoping for the best,” said Tom O’Brien, Plymouth County’s treasurer and chairman of the pension board.
The county hired Manning to advise the board on investment strategy in 2012. He had never managed a pension fund before.
“I was a schoolteacher [in the 1980s] in a suburb of Boston and one day, after staring at 20 vacuous stares, I had a talk with my Uncle Bill, a currency trader,” Manning said.
He spent two decades trading commodity futures at his uncle’s brokerage in Boston and stocks at brokerages in Chicago. Then he became a financial adviser to wealthy individuals and families at Merrill Lynch on Cape Cod.
The job at Plymouth County involved a small pay cut, but offered the opportunity to run a nine-figure portfolio for public employees. He got a taste of how painful rising rates could be in May 2013, when comments by Fed Chairman Ben Bernanke sent bond prices tumbling in what became known as the “taper tantrum.”
“We lost $20 million in three trading days and it took us 36 months of clipping coupons to make that back,” Manning said. Coupons are the interest payments bondholders receive.
Initially, Manning and O’Brien focused on boosting alternative investments such as private equity and infrastructure, which made up less than 5% of the fund. They were part of a flock of pension funds seeking alternative investments for higher returns .
Plymouth County hired Meketa as a consultant in 2015, and private-equity and infrastructure investments climbed to nearly 15% by 2020, according to fund financial reports. Returns improved.
“They have a level of comfort being different,” said Dynan.
Markets were on a tear the following year, lifted by the economy’s reopening from the pandemic. But Manning grew concerned in the summer about inflation. While many on Wall Street were calling price increases transitory, he worried inflation would persist, triggering rate increases and declines in stocks and bonds.
“We were going to conferences and being told that inflation was a paper tiger, or ‘this is not your father’s inflation,’” O’Brien said.
Manning consulted Bob Sydow, a high-yield bond fund manager at Mesirow who manages part of the pension’s money. Like Manning, he has worked on Wall Street since the 1980s.
“The money supply grew 43% over 26 months during Covid,” Sydow said. “I called it ‘free-range’ money and I thought it would generate a lot of inflation.”
From October 2021 to February 2022, Plymouth County pension sold about $80 million of its public stocks, or 6% of the fund’s assets, according to an email viewed by The Wall Street Journal. It shifted into real estate and infrastructure as well as short-term and floating-rate debt that is less sensitive to rising rates than traditional bonds, Manning said.
The fund lost 6.5% in 2022 while the median U.S. pension plan lost 14%. That outperformance has helped it stay ahead of other funds, even after it lagged behind the average in 2023.
Now, inflation remains above the Fed’s targets , and analysts’ forecasts for multiple rate cuts this year seem less certain. Plymouth County is keeping its strategy relatively unchanged, betting that rates will remain steady—or even climb.
Many investors are buying back into bonds because yields are at multiyear highs and they expect cuts by the Fed to trigger a rally. Manning takes a different tack. He thinks rates could stay high far longer than the Wall Street consensus, so he is using infrastructure funds to deliver income rather than bonds.
“Why do you have to own bonds at all in 2024?” Manning said. “It’s a legitimate question.”
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Wall Street’s hottest momentum trade has reversed sharply, as former winners tumble and heavily shorted stocks surge.
3 min
Wall Street’s hottest trade has gone ice cold.
For years, it paid off to buy stocks that were rising in price—and bet against struggling shares. The momentum trade was especially profitable this year, as investors piled into hot stocks including Micron Technology, Nvidia, Advanced Micro Devices and other artificial-intelligence darlings while wagering against those likely to be hurt by the embrace of AI.
The S&P 500 Momentum Index soared 44% in the second quarter, its best quarterly performance on record, and it surged 133% over the past five years, nearly double the broad market’s performance.
Mega funds and rookie investors alike piled into the trade, some using leverage and options contracts in an effort to amplify their returns, propelling the underlying shares higher.
“It is a self-fulfilling prophecy,” said Matthew Tym, managing director at Cantor Fitzgerald, of the trade.
Suddenly, the trade is a loser. The momentum index has tumbled more than 9% since July 1, lagging behind the S&P 500’s 2.8% gain. The index—which tracks stocks in the S&P 500 based on a “momentum score”—is on track for the biggest quarterly underperformance in 25 years. July was the second-worst month for the momentum trade in around 40 years, according to Bank of America estimates; the only month worse was April 2009, in the teeth of the global financial crisis.
Hedge funds that bought momentum shares while shorting low-momentum stocks suffered even more. At the same time, a basket of the most popular stocks held by hedge funds tracked by Goldman Sachs recorded its biggest one-month underperformance in July relative to the S&P 500 in more than 20 years, according to the bank’s analysts.
Momentum trading is based on a rather simple observation: Investments that go up tend to keep outperforming; those that underperform often remain laggards. This kind of trading might seem too simple a stock-picking strategy to work. Yet it often has.
“For decades, it didn’t take a lot of sophistication to run a momentum strategy and make a decent living at it,” says Agustin Lebron, senior researcher at EquiLibre, a trading firm.
Part of the reason: It takes a while for corporate and other information to spread to various investors, so they slowly build positions, producing buying momentum.
“A huge pension fund can’t flip around its positions in a day,” says Lebron. “Behavioral biases also account for some of the effect, as well—people tend to sell their winners too early and hold losers too long.”
Fans of the strategy point to the human tendency to extrapolate from past results—and chase investment returns—noting that momentum patterns have been evident in markets for decades, even centuries. They also say that some of the worst months for momentum strategies are during longer periods of outperformance.
Some have been doing the trade by buying the strongest investments in a sector while shorting the weakest; others lean in to rising markets or asset classes. Still others use a quantitative approach or turn to banks or others who sell ways to make distinct wagers on momentum as a “tradable factor” or a “thematic basket.”
The fans remain believers. “Any strategy has disappointing periods,” says Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management.
The surge in Moderna and other biotech stocks helped crush the momentum trade. These shares were among the most heavily shorted in recent years, but positive news on a cancer vaccine from Moderna and Merck sent those stocks flying, crushing some quant and other hedge funds. Moderna is up around 150% so far this month.
These traders had an especially rough day on Aug. 19, which Goldman Sachs told its clients was the worst day for “systematic long-short managers” in more than two years. About half of the losses were because of momentum trades, the bank said.
Some traders have begun to short, or bet against, the very stocks that propelled the momentum trade earlier this year. Net short positions in futures tied to the Nasdaq-100 index among speculators recently climbed to some of the highest levels of the past two decades, according to data from the Commodity Futures Trading Commission.
The about-face is a sign of how markets have become more treacherous for investors, even as indexes keep climbing. Part of the issue: the recent meltdown of Situational Awareness, a hedge fund that had piled into some of the most popular momentum shares, including chip stocks. After a period of market tumult, Nvidia shares rocketed almost 9% after its earnings, showing how quickly sentiment can shift.
Some investors say the run-up in share prices driving tech stocks higher reminds them at times of the dot-com frenzy decades ago.
Mike Ogborne, the founder of San Francisco-based Ogborne Capital Management, said he has grown more cautious on technology stocks and is keeping more of his portfolio in cash than he typically does.
And he is nervous about the surge in spending by technology giants and quarterly capital expenditures that keep rising.
“It is a little bit like Cinderella and the clock striking midnight. You don’t know when midnight is going to come around,” Ogborne said. “They don’t send a memo around telling you when the capex cycle is over.”
