P/Es and Pension Funding Ratios

Posted: 2 Feb 2007

See all articles by Martin L. Leibowitz

Martin L. Leibowitz

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF)

Anthony Bova

Morgan Stanley


Some evidence supports the intriguing conjecture that P/Es in the U.S. market may decline in times of both significantly lower, as well as significantly higher, real interest rates. The P/E response pattern would then resemble a tent that angles downward at both ends. For pension liabilities defined in real terms, very low real rates would then lead to a clifflike falloff in the funding ratio from the decline in equity valuations combined with surging liability costs. This article explores the risk implications of such a low-rate scenario and the equity valuations that could give rise to such a tent pattern.

Keywords: Portfolio Management, Asset/Liability Management, Equity Investments, Fundamental Analysis, Valuation Models

Suggested Citation

Leibowitz, Martin L. and Bova, Anthony, P/Es and Pension Funding Ratios. Financial Analysts Journal, Vol. 63, No. 1, pp. 84-96, Janaury/February 2007, Available at SSRN: https://ssrn.com/abstract=960558

Martin L. Leibowitz (Contact Author)

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) ( email )

730 Third Avenue
New York, NY 10017-3206
United States

Anthony Bova

Morgan Stanley

1585 Broadway
New York, NY 10036
United States

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