Union pension fund executives are looking to invest their assets smarter, moving slowly into such areas as small-capitalization stocks, specialized fixed-income investing, international equities and venture capital.
But, because they wear two hats, they're also pursuing a stronger U.S. labor force. Toward that end, they are making even greater use of proxy voting and economically targeted investments.
Still another issue for union funds is the reality of funding higher benefit payouts to an aging work force that is living longer.
Growth in the small-cap area came initially from existing stock managers, who asked union plans for permission to invest in small caps on a limited basis, and got it, said Jack Marco, president of Marco Consulting Group, Chicago, which specializes in union pension funds. Marco has 110 union clients representing about $25 billion in assets.
Now, union fund executives are saying they like it, and are making small cap a permanent piece of their pie.
The same is true with specialty fixed-income allocations. Union funds historically hired a core fixed-income manager to invest along all areas of the yield curve, but now they are hiring specialty fixed-income managers, said Terence Collins, president of ASB Capital Management, Washington.
Another equity investment getting some attention from union funds (if not their assets) is international.
International and small cap are a "real topic of conversation," said Alexander Sussman, senior vice president at Segal Advisors Inc., New York, a large provider of actuarial and consulting services to union funds. Union pension funds, not happy with the single-digit expectations of the stock and bond markets, are looking at alternatives, Mr. Sussman said.
The AFL-CIO has issued some guidelines for international investment that may be opening the door to increased allocations in certain areas, he said. For example, non-U.S. companies that don't pose a direct competitive threat to U.S. industry would be eligible. One example of this would be a German-based electrical utility company, Mr. Sussman said.
The AFL-CIO guidelines screen out investments that have a negative impact on jobs in the United States, and allow investment in companies with good labor records and no human rights violations, said Michael Steed, president of Trust Fund Advisors, a money management subsidiary of Union Labor Life Insurance Co., Washington.
International has "grown a little bit," Mr. Marco said. Funds now are looking more closely at where a company operates, not necessarily where it is based, he said. There are non-U.S. companies that employ large number of U.S. union members, while U.S.-based companies close plants and shift jobs overseas, he pointed out.
Still, "they don't want to send money overseas if it means losing jobs in the United States," Mr. Marco said. He said his firm is studying the issue of international investment for U.S. union pension funds and will issue a report, most likely in the fall.
"This is becoming a much more sophisticated market," said Gerald Seizert, vice president and managing partner for the Detroit office of Loomis, Sayles & Co. Inc. In the late 1970s and early 1980s, union funds were still very absolute return-oriented. Now they look at what the indexes are doing as a means to gauge fund performance, he said.
"The trend is to put more and more into equities," Mr. Steed said. "In the past they (union funds) were 100% in bonds," he said. Now it's probably closer to 60% bonds, 35% stocks and 5% cash.
Statistics point to an even more dramatic change. According to Pensions & Investments' latest survey of pension funds, allocations as of Sept. 30, 1993, were: 44.7% stocks, 42% bonds, 4.1% real estate, 5% cash, and 4.2% other. Use of equities by union defined benefit plans has climbed steadily in the last three years from 34.6% in 1989 and 26.2% in 1984. Nonetheless, Mr. Collins said, "I don't sense any radical changes" in recent allocations.
Meanwhile, although ETIs have been around for a while, union funds now are moving into newer forms, including venture capital and private placements.
Venture capital and private placements are both small, but growing segments of union investment.
One approach to provide venture capital funding to "middle market" companies that might have a tough time getting capital and also are unionized, Mr. Marco said.
Mr. Steed of Trust Fund Advisors said his firm manages a fund that looks to involve itself as a private placement lender to companies that "have some nexus in unions." For example, in a recent bankruptcy involving Vought Aircraft Co., Dallas, the fund provided capital that hinged on the maintenance of union jobs, he said. The end result was 5,000 saved jobs for the United Auto Workers union, plus a 75% return when Vought was bought out.
Right now the fund is relatively small at about $50 million, he said.
"ETIs have been a big topic" for union pension funds, said Mr. Marco. Many of them continue to pursue economically targeted real estate investments.
Money managers catering to union clients point out the advantages to real estate ETIs. Real estate investment can "create jobs and diversify the portfolio," said Mr. Collins.
Plus, returns should be competitive with stocks and bonds, he said.
One union-oriented real estate fund, the Multi-Employer Property Trust, recently grew in assets to its highest level ever, said Landon Butler, president of a company bearing his name in Washington. Mr. Butler, who is on the trust's policy committee, said the fund recently reached $740 million spread among 94 clients. The fund finances strictly union-built projects.
Similarly, Mr. Steed said real estate has become a way to meet the twin goals of job creation and responsible pension fund investment. ULLICO sponsors a real estate fund called J for Jobs.
And as new areas of investment open up to union funds, consultants and money managers are using proxies as a means to further the union agenda.
While voting proxies for the union cause is not new, doing it has really taken hold in recent years, with probably a majority of funds taking part, Mr. Steed of Trust Fund Advisors said.
Underlying a focus on increasing a fund's returns are demographic factors that will directly affect the liability side of the pension equation, said Mr. Sussman of Segal.
"The issue of pension fund liquidity is emerging more and more," he said. The plans aren't underfunded, but they have to make sure their assets are available to pay liabilities as they come due, he said.
"It's a problem that's manageable if they notice it. And they're noticing it," Mr. Sussman said. Union fund executives are making informed choices as to whether to match assets and liabilities, or not, he said.
