GREENWICH, Conn. -- The number of pension plan sponsors that hired and fired at least one external investment manager in a year rose by a "startling" amount, according to a consultant's recent survey of pension and endowment fund executives.
Out of 1,605 funds surveyed, 670 hired and fired an external manager in 1997. That's an increase of 20% from 1996, when 560 funds hired and fired a manager. In 1995, 510 funds hired and fired a manager, according to Greenwich Associates' 1998 investment management report, titled, "What now?"
The survey also indicates plan sponsors continue to increase their exposure to alternative and international investments.
Salaries at plan sponsors grew faster than inflation, but might still be considered low, given that responsibilities are rising and staffing levels are falling.
Pension funding ratios among corporate plan sponsors rose, while the aggregate unfunded liabilities of public plan sponsors fell, according to the survey. But the Greenwich survey shows cash flow is expected to become even more negative.
Use of directed commissions should rise, survey results show.
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Regarding the hiring and firing of external managers, Greenwich suggests turnover could be reduced if plan sponsors studied the managers more closely before they hired them.
Transaction costs in a manager change can amount to 2% of assets moved, Greenwich's consultants say.
"If U.S. pension plans expect to help achieve higher returns from manager switching, they are more than likely to be disappointed," said Charles Ellis, managing partner, according to Greenwich's report.
"The most startling figure is the absolute number of funds that switched," said John Webster, a partner for Greenwich.
Investment management fees paid to external managers rose slightly, with the mean fee rising to 42.3 basis points from the previous year's survey, which showed the mean investment management fee to be 42.1 basis points.
Alternatives continue to get attention from pension plan sponsors because of their higher expected returns, Mr. Ellis said.
Alternative investment assets among survey respondents grew $25 billion in 1997, to $85 billion.
While diversification plays a role, it's the "extraordinary returns" of alternative investments that are drawing allocations, Mr. Ellis said.
International investment by U.S. plan sponsors also continued to grow. nternational equities rose to 10.7% of pension assets, a rise of 100 basis points from 1996, the survey report notes.
The continued desire to move assets overseas is driven by the expectation that returns there will out-pace U.S. returns, even if that hasn't been the case recently.
Greenwich's research shows plan sponsors expect returns of 10.8% per year from international markets during the next five years, and 10.4% from the U.S. market in the same period.
While compensation levels are rising, staffing levels are not.
The average total compensation of corporate plan executives rose 5.7%, to $123,000 per year, with $21,200 of that coming in bonus form.
Public sponsors were paid on average $78,600 per year, with just $9,000 in bonus. Endowment officials received $127,000 total and $20,000 in bonus.
The relatively small compensation paid to these executives is a concern to Greenwich consultants.
"The job gets bigger and bigger, and more important, and it demands an increasing degree of specialized expertise and professionalism from practitioners," Mr. Webster said in the report.
STAFF LEVELS LOW
Greenwich's survey also shows staffing levels to be falling among the three types of investors surveyed.
Total professionals employed in investment management at corporate plan sponsors fell to 3.9 people from 4.1 in 1996. Public fund professional staffing fell to 4.9 people from 5.3, while endowment staffing fell to 4.2 people from 5.1.
Funding at corporate plan sponsors rose to 127% from 122% of accumulated benefit obligation, and to 110% from 105% of the projected benefit obligation, which takes into account projected salary increases.
Meanwhile, the total unfunded liability of public pension funds in the survey fell to $102 billion, a decrease of 14% from the previous year's $119 billion.
The expected net cash flow as a percent of assets fell to -1% from -0.9% the previous year. In total dollars, the cash flow dropped to
-$40.7 billion from -$35.7 billion.
The percentage of survey respondents who use directed commissions held steady from the previous year at 27%. But 30% of respondents expect to direct in the future. The most-used application of directed brokerage was for pension consulting fees.