Pension funds in the United States have been rebalancing their equity allocations, locking in hefty gains from the U.S. market and increasing their exposure to non-U.S. markets.
The flow from U.S. institutional investors could add wind to the sails of many international markets in 1996. Those markets generally underperformed in 1995, and many appear comparatively attractive on a value basis.
Funds that have rebalanced include the internally managed New Jersey Division of Investment, Trenton, and Unisys Corp., Blue Bell, Pa.
Between June and November, the New Jersey fund sold $700 million of U.S. stocks and $100 million of U.S. bonds and invested that $800 million in its balanced international fund.
Unisys periodically rebalanced its $3.4 billion fund amid gains, especially in U.S. equities. Much of the money taken from stocks went to employee benefit payments, while a smaller portion went to international equities, said Charles Service, Unisys' vice president, capital management and trust investments.
Already, the amount of rebalancing by corporate funds has been significant.
According to statistics from consultant Greenwich Associates, Greenwich, Conn., the domestic stock holdings of U.S. corporate defined benefit funds actually dropped to an average of 47.8% in the fall of 1995 compared with 48.2% a year earlier. But their international stock holdings increased over that time, to an average of 12.5% from 11.8% a year earlier, and their total international holdings rose to 14.5% from 14.1% a year earlier.
However on average, domestic stock holdings of U.S. public funds climbed to 42% this year from 40.1% in 1994, while their international stock holdings stayed flat at 8.6%, and total international holdings fell to 10.6% from 11.1% last year.
On the whole, corporate pension funds already have undertaken more rebalancing because many have been seizing the chance to move their holdings of international stock closer to their targets, which in most cases, remain above current investment levels, said Rodger F. Smith, partner with Greenwich.
Although Greenwich finds the growth rate of foreign investing will slow over the next three years, foreign equities still will be the fastest growing asset class of U.S. tax-exempt institutions.
Indeed, a number of pension funds are likely to make sizable international allocations:
Next year, the $16.6 billion New York City Teachers' Retirement System plans to begin phasing in its expected $500 million allocation to emerging markets, a process that should take two to three years.
The $60 billion California State Teachers' Retirement System, Sacramento, just issued requests for proposals for one to two passive emerging markets managers.
An asset allocation study by the $18.8 billion Los Angeles County Employees' Retirement Association has recommended international equities be increased to 18% from 15%, and international bonds be adjusted to 7% from 6.6%.
The $26 billion Minnesota State Board of Investment, St. Paul, voted to increase international equities to 15% of assets from 10%, with the bulk of the money going to emerging markets. (See related story on page 2.)
Among smaller funds, the Louisville Gas & Electric Co.'s $200 million pension fund just received a recommendation from its consultant that it invest for the first time in international equities and small-capitalization U.S. stocks.
The rationale for Louisville Gas & Electric's move: "The combination of international and small-cap equities provides a higher risk-adjusted return," said Joe Barnes, financial analyst with the Louisville, Ky., company. The consultant's recommendation did not "have to do with the run-up in U.S. stocks," said Mr. Barnes, who explained "we are basically strategic, or passive, investors, not tactical."
Clearly, however, funds will have to do something about the gains in their domestic equity and bond holdings if market appreciation boosted allocations above target. And given the market's rise, many funds would certainly have been affected.
For example, through Dec. 18, the price index of the Standard & Poor's 500 Stock Index was up 32.12%, compared with the 7% gain in dollars of the Morgan Stanley Capital International Europe Australasia Far East Index.
The differential was even more dramatic for emerging markets. For example, this year through Dec. 18, the International Finance Corp.'s composite investible price index in dollars was down 9.8%.
Given these differentials with the U.S. market, "a pure value-oriented investor would have to be somewhat intrigued about getting away from the U.S. market" and moving toward markets that lagged, said Bob Jaeger, executive vice president, Evaluation Associates Inc., Norwalk, Conn. But any such shifts by EAI's clients largely would come next year after funds analyze their 1995 results, he said.
But if clients do rebalance - and most probably will - "I think foreign equities would be the most likely recipient" of the spillover from U.S. stock holdings, he said. U.S. bonds, in contrast, now offer relatively low interest rates, and the long-term growth prospects appear lower than that of some non-U.S. markets, he said.
However, international manager searches/hires might not surge in 1996, say some consultants. Instead, to avoid adding to their managerial rosters, many funds are expected to give additional foreign allocations to existing managers - to the extent they feel is prudent. As a result, consultants say most new foreign equities allocations will be invested in developed markets, where most funds' existing managers have been assigned to invest.
However, searches that do take place would likely occur for these reasons: to launch an international program; to engage specialists, such as emerging markets or foreign small-cap managers; or because a new allocation is seen to be too large for current managers to handle.
This sobering outlook for managers comes after an apparently slower year for international hires in 1995. According to data of Eager & Associates, Louisville, Ky., for the first three quarters of 1995, international manager hires accounted for 20% of all managerial hires. In contrast, international hires were 22% of all managerial placements in 1994, Eager reported.