BOCA RATON, Fla. - With nearly 50% of its assets invested overseas, the W.R. Grace & Co. pension fund is more internationally diversified than most large U.S. funds, but its asset allocation is now being reviewed.
After years of focusing on corporate restructuring, W.R. Grace has turned its focus back to its $848 million pension fund.
The fund is conducting an in-house asset allocation study to determine whether to stay with its international exposure, scale back, or place even more in foreign investments. As of Nov. 30, the fund had only 30% in U.S. equities.
"The foreign markets have not been performing too well in the past few years. It used to be the foreign markets gave us a better return than domestic," said Afonso Wong, financial compliance administrator. For instance, in 1994 Grace's foreign equities were down 5.1% while domestic equities were up 6.2%.
Notwithstanding 1994, he said "over the years, foreign markets have been quite an anchor for us in terms of the domestic equity market when it was going down."
Indeed, Grace's average annual 11.6% return for the fund as a whole was strong in the five years ended Nov. 30, even though the period wasn't the best for foreign markets. The comparable indexes for that period returned as follows: Standard & Poor's 500 stock index, 18.22%; Morgan Stanley Capital International Europe Australasia Far East index, 9.87%; Salomon Brothers Broad Bond index, 7.95%; and J.P. Morgan Non-U.S. Government Bond index, 10.94%. The fund has been investing overseas on and off for more than 15 years - longer than most pension funds.
Grace saw its international allocation swell because of very strong performance in the early years. As time went on, the fund diversified its exposure beyond plain vanilla EAFE equities into regional and country-specific funds, passive equities, global equities and fixed income.
In 1981, it began with international equity portfolios managed by Rowe Price-Fleming International and J.P. Morgan Investment Management Inc. In 1987, the fund entered the foreign bond market. In 1989, it hired Capital Guardian for its first global equity portfolio. Grace added some foreign mutual funds along the way: a Japan index fund with Dimensional Fund Advisors in 1986; and continental European and Pacific Rim index funds with DFA in 1988 and 1989, respectively. It also invests in Rowe Price-Fleming's Latin American Discovery Trust, European Discovery Trust and Japan Discovery Trust.
Grace's U.S. and foreign equity allocations are just about even. It has 30% in U.S. equity and 32% in international equity. The international portion comprises 6% in a global account that may hold U.S. stocks, 22% in active equities and 4% in passive.
Its fixed income also is globally diversified. The fund has 21% in
U.S. fixed income and 16% in foreign fixed income, which was the top performing mutual fund asset class in 1996 yet is represented in very few U.S. pension fund portfolios.
Another 1% is in venture capital and timberland.
"We're definitely looking at the asset mix. Because of restructuring, we haven't been concentrating on it as much" in recent years, Mr. Wong said. The plan is fully funded.
Grace has many longstanding manager relationships, such as equity managers Oppenheimer Funds and Combined Capital Management, which have been on board since 1978 and 1979, respectively. But a few years back, Grace cut down on the number of managers to reduce duplication of styles and ease oversight.
"We did a lot of trimming down. In the old days we had eight domestic managers," said Mr. Wong. Now the fund has five domestic managers and six international managers.
Fund officials decided: "The optimal return is not going to be achieved by further diversification," he said.
Its current asset allocation study might look at whether to increase or decrease international, whether to pursue emerging markets as an asset class; and whether to diversify domestically, into, for instance, small-capitalization stocks. Currently, the fund only holds mid-and large-cap stocks. Fixed income is likely to stay the same.
The changes might involve some manager shifts "but it's still too early to say," Mr. Wong said.