International investing in defined contribution plans is on the rise.
The number of defined contribution plans with one or more international equity components climbed to 21% as of June, 1994 from 16% a year earlier and 11% two years ago, according to a survey of about 900 sponsors by A. Foster Higgins & Co. Inc., New York. That poll showed international was the fastest growing option for the second year in a row, said Brian Ternoey, a principal at the firm.
According to Tracker data from Eager & Associates, Louisville, Ky., among those sponsors that have added at least one international manager to their defined contribution plan this year were: Owens-Corning Fiberglas Corp., Toledo, Ohio; EG&G Inc., Wellesley, Mass.; United Airlines, Chicago; and Centerior Energy Corp., Independence, Ohio.
In the first half of 1994, international placements comprised 11.5% of all managerial hires in defined contribution plans. In comparison, international represented 7.6% of the defined contribution hires in all of 1993 and 7% in 1992, Tracker data show.
During the past 21/2 years, 58% of the international hires recorded by Tracker represented new options, while the remainder were replacements of or additions to existing international managers.
Despite that large increase, Tracker's data understate the degree to which international is being added to defined contribution plans, said Douglas Peabody, account manager with Eager. Many companies are including an international component in a bundled program that includes various options, he explained. In that case, specific components of the bundled programs wouldn't surface in the Tracker report.
Why the mounting interest in international? Amid warnings that U.S. markets won't soon repeat their go-go performances of the 1980s, investors increasingly are shopping abroad, especially as they hear about some sky-high returns from emerging markets.
"In the last couple of years, returns have been good from international equities, which has fueled sponsors' interest," said Foster Higgins' Mr. Ternoey.
More employees also have been pushing for an international option. But so far, their actual participation in the option when offered has been slight. According to Foster Higgins' survey, when participants were offered an international equity option, only 7% invested in it as of mid-year 1994, compared with 5% in last year's survey. As Foster Higgins' Mr. Ternoey explained: "It takes awhile for employees to really put their money where their mouth is."
Experts debate whether the government's 404(c) rule has spurred international investing in 401(k) plans. Mr. Ternoey doesn't think that voluntary regulation -whereby companies should have at least three diverse options in D.C. plans - necessarily lead to international investing. In his view, "companies can find much easier ways to comply with 404(c)" than adding an international fund.
In choosing an international option, companies most typically select a broad international or global equity fund. But the actual choices being marketed are growing astronomically in number and type. For example, Matthews International Funds, San Francisco, unveiled two relatively exotic-sounding mutual funds, designed for institutional and retail customers: Matthews Pacific Tiger Fund for the stocks of Asia excluding Japan and the Matthews Asian Convertible Securities Fund.
G. Paul Matthews, president, expects the latter fund to be an easier sell than the Pacific Tiger fund for high-growth Asian equities. His reasons: the Asian Convertibles fund is not only unique, according to him, but also offers a cushioning feature. Because of its equity features, the fund's value will rise in step with rising stock markets; but on the downside, its fall will be partly cushioned by the interest rate of the bonds in the portfolio.
While such exotica might be hard for many companies to swallow, a few companies already are looking into emerging markets.
"Because of last year's enormous gains (in emerging markets), individuals have approached their company's human resources department and asked, first of all, about having an international fund, and then about emerging markets," said David Orlando, a consultant with the Wyatt Co. in San Francisco.
And it has not been all talk. One high-technology company Mr. Orlando would not identify has selected an emerging markets fund as its plan's first international offering - instead of a broad international fund.
Two other West Coast clients also are considering an emerging markets offering for their 401(k) plans, said Mr. Orlando, who wouldn't identify either client. Both companies are expanding their program's overall options - in one case to about 16 from eight and the other, to 10 from six. While one of these companies already has a broad international equities fund, the other one doesn't, he said.
One company that has both a broad international and an emerging markets option in its 401(k) is consultant RogersCasey, Darien, Conn.
The company added an international fund in 1992 and an emerging markets offering last year, said Narayan Ramachandran, managing director.
But most companies still are in the process of adding their first international fund - if they are doing it at all.
Cadmus Communications Inc., Richmond, Va., is not only generally seeking to diversify investments of its $41 million 401(k) plan for employees and its $22 million defined benefit plan but also to offer all of its employees the same options, including those of a recently acquired company.
Last November, Cadmus Communications acquired the Journal Division of Waverly Press, which had been offering international as an option in its defined contribution plan. As of Jan. 1, Cadmus plans to combine the two defined contribution plans to create a $49 million plan and to employ T. Rowe Price as record keeper, trustee and investment manager of the combined plan's six options, which will include an international one, said Mary Habel, manager of employee benefits.
This year's changes to the $11 million 401(k) plan of First Hospital Corp., Norfolk, Va., included adding an international equities option, specifically the Templeton Foreign Fund. The company also changed the plan's administrative agent - to Wyatt Asset Services - selected Bank of New York as outside trustee, and changed all of its previously existing four investment options.
But why was international added? "The most important reason was that quite a few participants requested it," recalled William Tausig, the company's chief financial officer.
Not only do people recognize the diversification benefits of international investing, and that "two-thirds of the world's market capitalization is outside the U.S.," but also the return possibilities. After all, in more recent times, "international funds' performance has been good," said Mr. Tausig.