WASHINGTON - The $6.8 billion World Bank employee benefits fund is undergoing a major asset allocation review that will examine its unusual 50% target to non-U.S. investments.
The review also will study the fund's currency hedging policy and its relatively low (18%) fixed-income target.
World Bank's overall 82% allocation to equities and "quasi-equities" - private equity, real estate and high-yield bonds - ranks the fund among the more aggressive investors.
Afsaneh Mashayekhi Beschloss, director of the World Bank's pension department, said fund officials have embraced this posture for two main reasons: Benefits are indexed to inflation, and demands on its pension assets aren't severe (the fund has more than two active participants for every retiree).
The new study will examine whether the fund's 5-year-old allocation has been effective. At the time, the high allocation to equities was made to increase diversification and produce higher returns.
"Performance will definitely be one of the items for review," said Mrs. Mashayekhi Beschloss. "We'll see how we performed compared with how the fund might have fared if we had not been so heavily invested internationally."
Mrs. Mashayekhi Beschloss said the fund has posted an 8.8% return (in nominal terms) for the five years ended Dec. 31, 1994.
Besides performance analysis, the fund will undertake "asset-liability management exercises" and from there, create a strategic asset allocation, she said.
Following the 1990 study, the fund had lifted its non-U.S. equities target to 39% from 20% and trimmed its policy for U.S. stocks to 30% from 42%. It also sliced its U.S. fixed-income target to 7% from 15%; non-U.S. bonds were inched up to 11% from 10%.
Real estate was cut to 6% from 8%, and a new category - high-yield bonds - was created for 2% of assets. The 5% allocation to private equity was unchanged.
One question to be answered in the review is whether the fund's 18% fixed-income target "should be more flexible .*.*. if, for example, equities looked less promising," she said.
Currency hedging also will come under the microscope. The fund now judges the performance of its non-U.S. stocks and bonds against benchmarks that are 50% currency-hedged for non-U.S. stocks and 100% hedged for non-U.S. bonds. The fund will review its policy for both fixed income and equities.
Currently, 15% of the fund's liabilities are in non-U.S. currencies. (The fund pays benefits in about 23 currencies.)
But the fund won't be looking to add asset classes. "We're in all of them already except for commodities and art," she said. And, no money manager changes are planned.
The study should take about six months, although no time limit has been set.
In other developments:
The employee benefit fund terminated its use of Strategic Investment Partners, Arlington, Va., because its tasks are now being handled in-house. Strategic had been an adviser on about $5 billion of the fund's assets; the firm had assisted the fund with money manager selection and short-term tactical asset allocation. Strategic also had handled currency hedging for the fund's $2.65 billion of non-U.S. equities on a relatively passive basis.
To replace Strategic's role with currencies, the fund hired four currency overlay managers: J.P. Morgan Investment Management Inc., New York; Goldman Sachs Asset Management, New York; FX Concepts Inc., New York; and State Street Global Advisors, Boston. The fund is now determining the size of the assignments each will receive.
The fund has shortlisted five firms in its search for a bond manager to run $200 million.
The new manager will replace one that will be terminated in the next few weeks, said Mrs. Mashayekhi Beschloss. She would not identify the manager or name finalists. The new manager will be funded with the $100 million from the current manager and by reducing the allocations of the fund's four other bond managers.
The bank hopes to pick the new manager in November.
The fund also is looking to bring on board a senior equity strategist, "because equity is such a large portion of our portfolio," Mrs. Mashayekhi Beschloss said. The fund has an allocation of 82% of its total assets to equities.
Kelda J. Caldwell already is investment officer for domestic equities and hedge funds, and Arun S. Murlidhar is investment officer in charge of foreign equities and emerging markets, as well as currency overlay.