Foreign invested assets of the largest 200 U.S. defined benefit pension plans grew 34.7% to $225.6 billion during the two years ended Sept. 30, 1996, according to data collected for Pensions & Investments' survey of the largest U.S. employee benefit funds.
Moreover, foreign invested defined contribution assets swelled 43% to $8.8 billion over the same two-year period.
(P&I is making a two-year comparison because of reporting discrepancies in the 1995 survey. Also, the defined contribution percentage increase excludes 1994 assets of the Teachers' Insurance Annuity Association - College Retirement Equities Fund, New York, which was reclassified as a money manager in 1996.)
As in the past, allocations to foreign equities remain far larger than to foreign bonds in both defined benefit and defined contribution plans. Among the top 200 sponsors' defined benefit plans, non-U.S. stock holdings in the two years jumped 44.5% to $189.2 billion, well ahead of the 15.59% cumulative two-year return of the Morgan Stanley Capital International Europe Australasia Far East index in U.S. dollar terms. On a market-adjusted basis, equities were up a healthy 24.8%.
However, in defined benefit plans, international bond holdings rose only 5% to $36.2 billion, sharply below the 22.53% cumulative two-year gain of the Salomon Brothers World Government Bond index excluding the United States.
In defined contribution plans, "international equities is currently the most popular new option being introduced," said Roger Bransford, managing director of Watson Wyatt Investment Consulting, shortly before his death. And the P&I data reflect that popularity.
Among the defined contribution plans of the 200 largest plan sponsors, in the two years ended Sept. 30, international equities holdings (excluding TIAA-CREF's 1994 assets) leapt 60.2% to $7.9 billion - 38% when adjusted for market returns; defined contribution holdings of international bonds actually fell 5% to $974 million from $1.027 billion two years earlier.
The growth of foreign stocks among defined benefit plans made sense to Watson Wyatt's Mr. Bransford.
"What we're seeing is a gradual movement of (investors) trying to get closer to their targets" for the asset class, "and a disproportionately (large) amount is going into international equities."
Some funds are using portfolio rebalancing to help boost their non-U.S. stock holdings, moving some assets from hot performing domestic equities that exceed their target to non-U.S. stock holdings.
Why haven't non-U.S. bonds caught on strongly yet with pension funds? Experts cite a variety of reasons. One is the trend among funds to allow domestic bond managers to invest a certain portion of their assets outside of the United States. This practice limits the amount that is specifically targeted for non-U.S. and global bond accounts.
Another reason is the perception by some that foreign bond returns could be more volatile than foreign stocks because currency movements are believed to affect foreign bond returns more than stocks.
Still yet another reason involves overall allocations. Because many plan sponsors have been lifting total stock holdings - often at the expense of bonds - funds have more assets to put into non-U.S. stocks than bonds, for diversification.
However, some funds clearly have been increasing their attention to global and international bond portfolios. David New, a director of Asset Strategy Consulting, West Los Angeles, said his firm's clients "actually have been increasing their exposure to international bonds." Attractions he cited are diversification and the prospect for "a pick-up in return" compared with returns of strictly U.S.-invested bonds.
According to P&I data, defined benefit funds that raised or established international/global bond holdings in the 12 months ended Sept. 30 included those of: Pacific Gas & Electric Co., San Francisco, $133 million; Western Conference of Teamsters Pension Trust, Seattle, $140 million; State Retirement and Pension System of Maryland, Baltimore, $747 million; and New Jersey Division of Investment, Trenton.
In the case of New Jersey, in the year ended Sept. 30 the fund raised its international equities 90% to almost $4.6 billion and foreign bonds 31% to $2.59 billion. Director Ronald Machold explained that in 1995, New Jersey's State Investment Council approved an increase in international (combined stock and bond) investing to 20% of assets from 15%. Thus, newer foreign investments reflect that "we are moving closer toward that target," he said.
However, the $15 billion fund of Chrysler Corp., Highland Park, Mich., lowered its non-U.S. bond holdings, while increasing non-U.S. stocks. According to Russell Flynn, Chrysler's director-pension fund investments, the fund's global bond allocation was reclassified as "domestic bonds" around mid-1996. But as part of the change, the fund permitted certain managers of these domestic bonds to make international bond investments on an opportunistic basis. Thus, the fund as of Sept. 30, had $100 million in non-U.S. bonds, he said.
In turn, the fund increased foreign stocks. The reasons: diversification and because "that's where we believe we can get better returns," said Mr. Flynn. In the past year, the fund raised its allocation to non-U.S. stocks to the current 17% from about 14%.
According to P&I data, in the year ended Sept. 30, funds significantly raising non-U.S. equity holdings included: Oklahoma Public Employees' Retirement System, Oklahoma City, to $400 million from $282 million; Ohio State Teachers' Retirement System, to $3.518 billion from $1.942 billion; and Arizona State Retirement System, Phoenix, to $2.1 billion from $1.6 billion.
First-time foreign equity investors included the Atlanta-based Employees' Retirement System of Georgia and the Teachers' Retirement System of Georgia, at $101 million and $277 million, respectively. After the funds won legislative authority in 1995 to invest abroad, they began foreign investing late that year, said an official who asked not to be named.
Last summer, the $3.5 billion Cook County Employee's Annuity & Benefit Fund, Chicago, inaugurated non-U.S. stock investing with a $30 million allotment. But to do so, the fund had to use the basket clause that allows a deviation from the list of legal investments. For more than a year, a bill to allow foreign investing has been pending in the Illinois Legislature, said Executive Director John E. Fitzgerald.
Hewlett-Packard Co., Palo Alto, Calif., added an international equities fund to its defined contribution plan in February. Clearly, that caught on with participants. As of Sept. 30, HP reported $37 million in defined contribution plan foreign equities. By early January, assets in the non-U.S. stock fund had reached $50 million, said Brent Hartman, the company's employee benefits financial manager.
