Two corporate pension funds with radically different exposures to the stock market have attained results that are much closer than their stock allocations would suggest.
American Airlines Inc., Fort Worth, Texas, had only 23% of its $3.96 billion in defined benefit assets in domestic and foreign stocks as of Sept. 30. Pacific Gas & Electric Co., San Francisco, had 75% of its $4.76 billion in defined benefit assets in stocks. By contrast, the average equity allocation by the 200 largest pension funds is 56.2%. Among corporate plans in the top 200, however, the average stock allocation was 62.6%.
The American Airlines fund has an overall compound annual return of 16% for the five years ended Nov. 30, 1995, according to William F. Quinn, president of AMR Investments, which invests the assets of the fund. The $4.76 billion PG&E fund, had an overall compound annual return of 13.1% for the five years ended Sept. 30, said Peter K. Corripo, director-investments and benefit finance at PG&E.
The domestic equity returns for each fund for the same five-year periods were 19.3% for American Airlines and 17.7% at PG&E.
Mr. Corripo said the PG&E plan's heavy equity exposure is by design and "reflects our belief that stocks outperform bonds over the long term." He said about half of the fund's domestic equities are passively managed.
Mr. Quinn said American's relatively light equity exposure reflects the plan's long-standing policy of immunizing plan liabilities against interest rate fluctuations using a dollar-duration immunized bond portfolio, which has been the cornerstone of the fund since 1980.
In a dollar-duration portfolio, the dollar change in the value of the assets and plan liabilities becomes approximately the same.
Approximately 70% of American's pension plan assets are invested in bonds, much of that in the fund's long-duration immunized portfolio.
"We have no bias against equities, but a bias toward hedging our liabilities against declining interest rates," said Mr. Quinn.
The strategy has paid off for American. In 1995, American's bond portfolio was up more than 55%, said Mr. Quinn. That more than offset plan liabilities, which increased by slightly more than 40%, largely because the fund lowered its discount rate to 7.25% from 8.75%.
"We have done this (immunization) in one form or another since 1980-'81 and since that time our long bonds have done as well as equities," said Mr. Quinn.
American's immunized bond portfolio returned a compound annualized 17.6% for the five years ended Nov. 30, while the S&P 500 was up 16.8%.
Neither PG&E nor American Airlines anticipates making any dramatic change in its exposure to the equity market and will stick with its respective strategy.
Mr. Quinn said American's equity portfolio could increase slightly as its moves a portion of its estimated $790 million in short-term bonds into equities, but not enough to shift the fund's primary emphasis from its dollar-duration immunized bond portfolio.
Mr. Corripo said PG&E "carefully" rebalances its portfolio around its approximately 70% target allocation to equities every three to five years. "It reflects a strategic allocation decision, rather than a tactical decision.
"We don't expect to make any changes in that approach. We have done well."
As of Sept. 30, the highest allocation to stocks among the top 200 pension funds was 80% at Northwest Airlines. Other corporate funds with relatively high equity allocations include J.C. Penney Co., 76%; Motorola Inc. and Amoco Corp., both with 74%; Deere & Co., 73%; and SBC Communications Inc., 70%.
Funds with lower than average equity allocations include Phillips Petroleum, 32%; Procter & Gamble Co., 40%; Union Carbide Corp, 41% and RJR Nabisco Inc., with 45%.