International investments by the Top 200 U.S. pension funds climbed to 8% of defined benefit assets in the year ended Sept. 30, up from 5.9% the year before, Pensions & Investments' data show.
As surging markets helped unleash pent-up demand for non-U.S. investments, total foreign holdings leapt 49.6% in the 12-month period. But on a market-adjusted basis, overseas investments rose 22.8%, down from the 26.5% rise of the previous 12 months.
Nonetheless, international's popularity was clearly on the rise last year.
For calendar year 1993, international hires represented an all-time high of 19% of total pension fund hires, according to the Tracker service of Eager & Associates, Louisville, Ky.
And, as of Sept. 30, new cash allotments were a bigger contributor to the total rise in international holdings than was market appreciation, according to P&I data. As of September, of the total $42.08 billion of new international investments in defined benefit plans, $23.568 billion came from new allocations, while $18.512 billion represented market appreciation, P&I estimates.
In the year ended Sept. 30, foreign equities holdings posted a much stronger growth rate than did foreign bonds - a reversal of a recent pattern. On a market-adjusted basis, investments in non-U.S. equities rose 25.9%, compared with 11.7% for bonds. It was no wonder investors were attracted to non-U.S. equities.
For the period, the Morgan Stanley Capital International Europe Australasia Far East Index rose 26.75% in dollars.
This year, 135 of the Top 200 pension funds report having non-U.S. investments in their defined benefit plans. Funds reporting substantial rises in foreign holdings include the Florida State Board of Administration, with $898 million abroad as of September; the Retirement Systems of Alabama, with $1.18 billion in non-U.S. holdings; the California State Teachers' Retirement System, whose non-U.S. assets climbed to $3.044 billion;United Technologies Corp., whose foreign assets reached $1.529 billion.
"We made a substantial contribution over the year," acknowledged Susan Schueren, senior portfolio manager-international equities for the Florida board. In the year ended September, the fund hired eight international managers, bringing its stable in the category to nine. The fund made the move after completing its homework on foreign markets and witnessing the "excess bub-ble" in the Japanese market shrivel to a reasonably attractive market level, she explained. The fund is now at its international target of 3.5% of assets.
Most of the rise of Alabama's foreign investments were in new allocations to foreign bonds. As of September, all $838 million of new foreign bond holdings were in Canadian bonds. But since September, the fund has expanded into the Australian bond market and it expects to broaden its exposure further, said Mary Hunter Harrell, investments director for the $12 billion fund.
Taking its overseas plunge, the $19 billion Minnesota board, St. Paul, invested initially in equities, starting in October 1992. By this past September, Minnesota had nearly reached its 10% target for non-U.S. holdings. This January, it inaugurated its foreign bond program by allowing four of its existing fixed-income money managers - Western Asset Management Co.; Miller, Anderson & Sherrerd; BEA Associates; and Standish, Ayer & Wood Inc. - to funnel up to 10% of the assets managed for the Minnesota fund into international bonds, said Howard Bicker, the fund's executive director.
Among foreign investment styles, broadly diversified accounts continued to reign supreme. For the year ended Dec. 31, 78% of all international hires were "general assignments," compared with 11% for emerging markets, 4% for Europe-only accounts and 6% for Asian investments, according to Eager & Associates. Passive international stock accounts declined in popularity. In 1993, they accounted for only 1% of all managerial hires, compared with 3% in 1992. Passive international bond accounts in 1993 accounted for only 1% of all hires, Eager's data shows.
Experts say broadly diversified accounts remain popular because of their breadth of coverage. But this past year, among the more popular managers were those who offered "augmented EAFE accounts," according to Jim Waterman, senior vice president of InterSec Research Corp., Stamford, Conn. Mr. Waterman wouldn't cite any such managers he had in mind. The benefits: although these managers are hired for EAFE accounts, they also are equipped to invest some assets in emerging markets, he said.
In contrast to defined benefit plans, defined contribution plans still have proportionately tiny amounts of foreign holdings. For the year ended September, non-U.S. assets were only 3.8% of the total $429.2 billion of defined contribution assets among the Top 200 funds. Equities still represent the preponderance of foreign-invested defined contribution assets. On a market-adjusted basis, foreign equities in the category climbed 36.5% to $13.5 billion, while foreign bonds vaulted more than 196% to $2.768 billion, as new allocations by the New York-based Teachers Insurance and Annuity Association sharply boosted the total. TIAA added almost $1.5 billion to reach $1.688 billion of foreign bonds. According to Dave Bullett, TIAA's senior vice president, between two-thirds and three-fourths of the fund's investments in foreign bonds are in privately placed non-U.S. corporate bonds, all denominated in U.S. dollars.