Big was best in 1997.
Corporate pension funds that invested huge chunks of money in large-cap domestic equities last year walked off with the best results.
The median return for 137 corporate pension plans surveyed by the Trust Universe Comparison Services was 19.3%, said Steve Remboski, vice president. Public funds didn't fare quite as well, with the median public fund returning 18%.
Asset allocation was the key to performance, Mr. Remboski said. As of Dec. 31, 1997, the average corporate fund in the TUCS universe was invested 61.9% in equities and 27.3% in fixed income, while the average public fund had 58.2% in equities, 31.6% in bonds.
"The public funds had a more conservative asset allocation, based on their position at the end of the year. Corporate funds can afford to take more risk than public funds. If their company revenues are healthy, they can make up any shortage from corporate earnings, while public funds must rely on tax revenues, which don't change as often."
Another industry group that studied 1997 returns of 40 corporate pension plans reported a median return of 20.27%. Domestic equities, which produced a median 29.96% return, gave a shot in the arm to the pension funds that owned them, said a spokesman for the group, which asked to remain anonymous. Fixed-income products also performed well, achieving a median 9.8% return. Funds that held long-duration bond portfolios, with a duration of around 10 years were best positioned. A median 3.29% return for international equities hurt many pension funds, with the most damage occurring in the fourth quarter, when the median return skidded to -8.04%.
The funds that were most aggressive in their allocations to domestic equities were rewarded with the best returns. And those whose domestic equities were passively managed fared even better than those that use more active management of equities, since the Standard & Poor's 500 index returned 33%, while the median return on domestic equities was 29.96%, the spokesman said.
In interviews, several pension fund executives concurred that a heavy weighting in large-cap domestic equities boosted returns.
Kim Walker, president U.S. West Inc.'s $17 billion pension fund, Englewood, Colo., said: "The more U.S. equities in a pension plan last year, the higher the results. Being in emerging markets didn't help."
Robert Angelica, president of AT&T Investment Management Co., Berkeley Heights, N.J., which manages both the $21 billion defined benefit plan for AT&T and the $36 billion defined benefit plan for Lucent Technologies Inc., said returns for the two plans exceeded their targets thanks to a high allocation to U.S. equities, and a lower allocation to international equities.
"In addition, we had a high exposure to private equity funds, including leveraged buyout and venture capital products, and their returns were superior to those of the public equity markets," he said.
While it's ATTIMCO's policy not to disclose specific returns, Mr. Angelica did say he was happy with last year's results, which were "at or near the top of our peer group."
According to TUCS, the corporate pension funds in the top quartile returned 21.5% or higher.
Fixed income, which had a small allocation, also performed well in ATTIMCO portfolios, because the duration used was almost a year longer than that of its benchmark, the Salomon Broad Investment Grade Bond index.
Stanley Wright, president, Sears Investment Management Co., reported that the Sears Roebuck and Co., Hoffman Estates, Ill., $11 billion pension fund returned 21.4% in 1997, placing it in the top quartile of its peer group.
At GE Investments, Stamford, Conn., the $39 billion pension fund's investments returned 20% overall in 1997, but certain individual strategies such as international equities outperformed, returning 35%, said John Myers, chairman and president. The pension fund also benefited from a well-timed asset mix, with more than 40% in domestic equities and 14% in fixed income most of the year.
A Xerox Corp. executive said that investments in the Stamford, Conn.-based $6 billion pension fund returned 20.2% overall last year. An overweighting in small-caps hurt in the fourth quarter, but the international component did well. It returned 9.6%, because it had half the normal weighting in Japan, with other countries adjusted accordingly, compared with Morgan Stanley Capital International Emerging Markets-Europe Australasia/Far East index, which returned 8.3% in the period.
Robert Hunkeler, vice president investments at International Paper, Purchase, N.Y., said that $1.4 billion, or nearly a third of the $6 billion pension fund, was restructured last year into small-cap stocks from large-cap stocks, which hurt near-term results, since large-cap equities outperformed in the fourth quarter. He declined to disclose specifics.
