Today, the IBM Belgium pension fund has 40% of equity assets invested in domestic equities. With the introduction of the euro, that allocation likely will shrink to below 10%, and even as low as 5% over time.
And IBM won't be alone. There may be a massive reallocation of assets within Europe by continental European pension funds.
That's because the very definition of what is a domestic asset will change for continental funds once the new single European currency starts Jan. 1. Instead of Belgium or France or Germany being the home market, the euro will broaden the domestic base to a market of 11 nations.
Two-thirds of European pension funds surveyed by Goldman Sachs International, London, and Watson Wyatt Worldwide, Reigate, England, say the euro will prompt them to revisit their current asset mixes.
What is surprising is how quickly the changes may occur. According to the survey, 57% of European funds planning a review intend to switch to a "euro compatible" portfolio during the next 12 months.
Continental European funds are plunging into euro-related issues. Only a few have arrived at any conclusions.
Leif Thorsen, director-international benefits for Alcatel Alsthom, Paris, said the shift to the euro "is a subject that is being debated within our pension plans within Europe."
Added Dieter Klein, who oversees Ludwigshafen, Germany-based BASF Aktiengesellschaft's 7 billion deutsche mark ($3.9 billion) in pension assets: "The most difficult question to answer is the speed and whether you need an interim solution."
BASF officials should reach a decision on its European bond and equity strategies in the next five to six months, he said.
For pension funds based in countries with small stock market capitalizations, the euro's startup can be a huge concern, as domestic funds might face sizable selloffs of domestic stocks. Foreign investors might not take up the slack.
Herwig Couvreur, proxyholder at the 5.1 billion Belgian franc ($138 million) IBM pension fund in Brussels, worries there will be more selling than buying of Belgian stocks, which compose only 2.2% of the Morgan Stanley Capital International Europe index and 4.2% of its economic and monetary union index.
"Given the fact we have such a small representation in the index, (money managers) can basically ignore Belgium and still have a good track record," he said.
Even where they do buy stocks, managers might confine their purchases to the three largest Belgian stocks, he said.
Others believe funds will revamp their asset mixes over time, using a combination of existing assets and new cash flows.
Sandy Rattray, head of European equity derivatives research at Goldman Sachs International, said: "It's easier to determine what funds will buy than what they'll sell."
For example, Dutch pension funds might reduce domestic bond exposure, using the proceeds to boost pan-European equity exposure, he said.
Karel Stroobants, deputy general manager of the 15 billion Belgian franc ($405 million) Voorzorgskas voor Geneesheren, Tandartsen & Apothekers VZW, Brussels, said he initially was concerned outflows from Belgian pension funds would hurt domestic stock prices, but since has moderated his views.
He questions whether Belgian stocks will be hurt more than other European stocks.
"A lot depends on retail money," he said.
WINNERS AND LOSERS
Still, there will be winners and losers. Flows from pension funds and insurance companies often will offset each other, but insurers are expected to rebalance more quickly, a separate Goldman study shows.
As a result, Germany and France -- home of major European insurers -- likely will see more selling initially, while the Netherlands, with its strong pension fund industry, is likely to see more buying activity at first.
However, a shift to sector-based investing could reduce substantially the level of capital flows. If institutions rebalance purely on a country basis, total trading volume could be as high as $153 billion; if a sector approach is adopted, as Goldman anticipates, it will reach only half that level.
What's more, as institutions diversify across Europe, Goldman expects they initially will buy into large-cap stocks, creating outperformance over the next one to two years.
Money already is starting to move. Jan Willem Baan, director of investments at the 12 billion guilder ($6 billion) Stichting Bedrijfspensioenfonds KPN, is close to hiring a manager to run a more than 200 million guilder ($100 million) pan-European equity mandate.
That represents a departure from the fund's strategy of investing through individual country mandates. If the pan-European approach proves successful, the size of the mandate might be increased, Mr. Baan said.
David McFadzean, investment group manager at IBM Retirement Funds Europe, Bedfont Lakes, England, which advises on $18 billion in IBM European pension assets, said it's likely some of IBM's country-specific portfolios will be changed to euro portfolios during the next 12 to 18 months.
While reallocations promise to be sizable, pension executives don't expect to reduce their domestic holdings to the market weighting in the index, retaining something of a home-country bias.
Brid Horan, general manager-pensions for the government-owned Electricity Supply Board, Dublin, Ireland, said: " I don't think asset allocation will shift totally to the euro, but I think the focus will broaden beyond the Irish punt. And certainly we will be looking at the issue quite actively. It will impact on asset allocation; there is no doubt about that because of the change in currency risk."
But other factors, such as relative performance of markets and the size and sector weighting of the Irish market, will affect the decision, she said. Currently, 60% of the 1.5 billion Irish pound ($2.1 billion) fund is invested domestically.
David Hogarty, in charge of business development, pensions, for Ulster Bank Markets' Dublin operation, said he expects, post-euro, the average Irish pension fund to maintain its 70% to 75% allocation to equities. But the allocation to Irish stocks probably will shrink to 25% during a five-year period, from 33% to 35% now, as euro assets are increased, he said.
Pension funds likely will put in place safeguards to avoid overnight changes in their portfolios, said Frans Ballendux, director, William M. Mercer Klein Haneveld Investment Consulting B.V., Amsterdam, The Netherlands.
Otherwise, "all of a sudden, you find yourself owning debt of the municipality of Palermo," he said.
Tactical considerations also will affect the pace of change. Fiat SpA, Turin, Italy, expects to keep its domestic bond weighting at 90% of total bonds as long as Italian sovereign debt continues to yield 30 basis points above German bunds, said Viglongo Filippo, who oversees the firm's 6 trillion lira ($34 billion) in insurance assets.
The benchmark for equity investments now is tied to the MIBtel index. But it likely will be switched to a euro-based benchmark, he said.
Carole Craig contributed to this article