The growth in foreign holdings by defined benefit plans was spurred mainly by the large allocations of a few big pension funds and market appreciation, according the results of Pensions & Investments' annual survey of the largest pension funds.
Adding a big boost to the total was the California Public Employees' Retirement System, Sacramento, which lifted its non-U.S. holdings to $29 billion as of Sept. 30, up $7.3 billion from a year earlier. Moreover, non-U.S. holdings by the New Jersey Division of Investment, Trenton, grew $3.41 billion to $10.59 billion; and foreign investments by the Ohio State Teachers' Retirement System, Columbus, jumped more than $4.8 billion to $8.35 billion.
Investment performance also added to the total. In the year ended Sept. 30, the Morgan Stanley Capital International Europe Australasia Far East index rose 12.5%, but many managers fared better. For instance, the median international equity manager in the universe of Pensions & Investments Performance Evaluation Report posted a 19.6% return for the year ended Sept. 30.
Overall, international investing by defined benefit plans for the 200 largest U.S. pension funds grew moderately to $323 billion in the year ended Sept. 30, according to the annual survey by Pensions & Investments.
On the face of it, that rise was 43.2% above the prior year's level. But P&I's 1996 survey did not include data of three large funds - among them, the California State Teachers' Retirement System, Sacramento - whose international holdings collectively totaled $33 billion as of Sept. 30.
Foreign allotments in the largest 200 funds' defined contribution plans climbed to $12.72 billion, up 44% over the level 12 months earlier.
Over the two years ended Sept. 30, 1996, foreign holdings by the defined benefit plans of the nation's 200 largest plan sponsors climbed 34.7%; foreign assets in these companies' defined contribution plans grew 43%.
For many pension funds there was "definitely a moderation" in the growth of non-U.S. investing last year, said Joe Fein, vice president, investment counselling, Sedgwick Noble Lowndes Asset Consulting, Roseland, N.J.
One contributor to the slowing growth: the fact that more plans are nearing their target international allocations, he said. But market factors also played a role.
While last year's Asian market turmoil may not have been a big contributor - the worst news from there didn't break until after Sept. 30 - the strong U.S. market had an impact.
"I think the dominant event earlier in the year was the continued strength in the U.S. market," said Jim Waterman, senior vice president, InterSec Research Corp., Stamford, Conn.
"In 1996 as the U.S. market rose, a good number of plan sponsors . . . used some money from their gains in the U.S. market to boost their international exposures to get closer to their non-U.S. investment targets. But the U.S. market surprised investors again in 1997," he said.
And last year, a number of investors reacted differently.
"Rather than repeating the process from the year before, a lot of plan sponsors (decided to) wait until the U.S. market softened" to expand or start investing abroad, Mr. Waterman said.
The rise of the U.S. dollar was also a deterrent, experts said. That may have been especially true with non-U.S. bond investments. Without being adjusted for missing data in 1996's survey, the largest 200 funds' defined benefit non-U.S. bond holdings (actively managed and indexed) reached $42.26 billion in the year ended Sept. 30, up 16.7% over the previous year.
In comparison, the largest funds' holdings of non-U.S. equities (actively and passively managed) hit $280 billion as of Sept. 30; that was up 48.4% over the level a year earlier.
InterSec's survey data generally support the slowed growth pattern last year. In the first half of 1997, that firm found that newly funded portfolios of cross-border investments (excluding allocations to pooled vehicles) came to $14.3 billion; that's about 42% of the $34.1 billion invested in all of 1996.
Of the $14.3 billion, $8.3 billion consisted of active non-U.S. equity allocations.
Big push by a few
However, in 1997 a few funds did push on strongly with their foreign investing programs. For instance, over the past three to three-and-a-half years, CalPERS' almost $128 billion fund was "increasing its equity component - both of U.S. and non-U.S. equities," said spokesman Brad Pachecko.
The fund has targets of 20% of total assets in foreign stocks and 4% in international bonds. As of Sept. 30, the fund had reached levels of 19% in non-U.S. stocks and 3.7% in foreign bonds, he reported.
The $64 billion Teacher Retirement System of Texas, Austin, boosted its foreign equities holdings by about $2.7 billion, when adjusted for reporting errors in the 1996 survey. During the year ended Sept. 30, "the board decided to institute a passive international equities allocation that would comprise roughly half of the fund's total non-U.S. equities holdings," said James Hille, investment officer, international equities.
Why the interest in a passive allotment? The in-house managed fund wanted "a hedge against manager turnover - they needed an (alternative) in case the active in-house managers left," he said.