Assets managed by the top 50 firms for international and global accounts for U.S. institutional tax-exempt clients rose 31.9% to $600.1 billion, according to Pensions & Investments' annual survey.
The increase is attributable to an increased interest in investing in developed overseas equity markets -- particularly in Europe -- and equity market appreciation, according to money managers and consultants. For the 12-month period ended March 31, the Morgan Stanley Capital International Europe Australasia Far East index returned 18.9%; the MSCI World index, 32.5%.
"Clients are not necessarily getting in for the first time, but for the most part we see folks uncomfortable with the valuations in the domestic markets and looking for a way to rebalance," said Christopher Fox, managing director of Summit Strategies, St. Louis, an investment consultant.
According to InterSec Research Corp., Stamford, Conn., U.S. tax-exempt assets in the overseas markets increased in terms of absolute dollars, but decreased as a percentage of pension assets, to 10.2% as of Dec. 31 from 10.6% a year earlier. Sarah Bever, vice president at InterSec, said she thought the decrease was mainly a function of the rapid growth of the U.S. equity market, which boosted the percentage of domestic equity assets.
The top five managers of international/global tax-exempt assets were a carbon copy of last year's ranking. State Street Global Advisors, Boston, led the way with $63.1 billion in assets as of March 31. SSGA's assets increased a staggering 45% from $43.5 billion a year earlier.
Second-ranked Barclays Global Investors' assets were $46.4 billion as of March 31, up 19% from $38.9 billion a year earlier. Third place Capital Guardian Trust Co.'s assets grew to $43.8 billion, up 12.5% from $38.9 billion.
Morgan Stanley Asset Management/Miller Anderson & Sherrerd LLP placed fourth with a $37.3 billion in international/global tax-exempt assets as of March 31. The assets reflected a merging of assets this year of the two firms. A year earlier, Morgan Stanley reported assets of just less than $30 billion, while Miller Anderson reported $2.5 billion.
UBS Brinson, with $33.1 billion, held the fifth-place spot occupied last year by Brinson Partners. Brinson, which merged with UBS in the fourth quarter of last year, reported international/global assets of $25.9 billion as of March 31, 1997.
While international and global equity managers have seen a continued boom in assets, their fixed-income counterparts have seen less vigorous growth.
The disparity in annual returns between the U.S. bond market and international bond market was unprecedented in the 12 months and hit some foreign bond managers hard, according to Ken Windheim, president Strategic Fixed Income LLC, Arlington, Va.
The Salomon Broad Bond Index return was 12% for the year ended March 31, while the Salomon Non-US World Government Bond index had a return of 2% and the Salomon World Government index, 5.4%.
Strategic Fixed Income, which manages global and international bond accounts exclusively, lost $1.1 billion in assets and dropped from 26th to 43rd in the survey with $4.1 billion in assets under management.
The firm has lost accounts and saw assets flow into the better-performing U.S. bond market, Mr. Windheim said. His firm's portfolios had mixed results. THe international composite topped the index for the 12 months, returning 3.77%, but the global composite lagged the index with 4.88%.
Mr. Windheim also cited an inadvertent increase in domestic equity allocations on the part of plan sponsors as a reason for the decrease in global and international bond overall allocations.
"It seems like to me that we may be at a peak in the U.S. stock market and with the dollar," Mr. Windheim said. "If the market tops out it would be good for non-dollar fixed income because the dollar would probably be devalued."
Another global bond manager, Pacific Investment Management Co. gained $705 million in assets, but dropped from 39th to 50th in the annual ranking with $3.7 billion in total assets under management.
Anthony Faillace, portfolio manager at Newport Beach, Calif.-based PIMCO, said the firm is dropping non-dollar bonds from its global portfolios.
"The non-U.S. assets or non-dollar bonds of developed nations are not as attractive as they once were," Mr. Faillace said.
Playing catch-up
Brian Matthews, senior vice president at Payden & Rygel, Los Angeles, said bonds are playing catch-up with international equity, which always has enjoyed popularity among plan sponsors. He predicts non-dollar bonds will be picking up in the near future. His firm manages 72% of its international portfolio in fixed income.
Consultant Rich Ranallo of Segal Advisors, Cleveland, said he always has viewed global bonds as an easy way for pension funds to increase international exposure, but admits that the low performance of the international markets has made it harder to convince clients to move into the asset class.
"Sometimes, when it's not working, might be the best time to do it," Mr. Ranallo said.
Emerging markets is an area to which fair-weather fans have flocked in the past, and Summit Strategies' Mr. Fox said he has seen more interest in the asset class lately. He is conducting a search for a dedicated international money manager for an unidentified client, his first such search in three years. In his view more plan sponsors want to "carve out" an allocation from their existing international portfolio for subasset classes such as emerging markets.
Barclays Global Investors is one firm that continues to make a push in emerging markets. The firm has brought in a couple billion dollars in new emerging markets assets since March 31, said Jim Creighton, chief investment officer for the San Francisco-based firm.
BGI has incorporated the asset class in an international equity index fund called the BGI All Country World Index ex-US Fund. The fund tracks the 46 international equity markets in developed and emerging nations.
Putnam Investments, Boston, has developed another global strategy to bring in new clients. Tom Lucey, chief of institutional business, wants his clients to look at their entire equity allocation as a global one. He expects many pension portfolios will be fully global five years from now. He also predicts more sector analysis on the part of money managers as opposed to regional analysis.
NEW HIRES
Putnam has prepared for Mr. Lucey's global theory by recruiting 30 portfolio managers and global analysts over the last couple years. Putnam's client base for international/global portfolios has increased to 144 clients in April from 59 clients at the end of 1995, Mr. Lucey said.
In this year's survey, Putnam's assets increased to $17.6 billion from $10.2 billion in 1997. The increase is mainly from market appreciation, performance and new allocations, said Mr. Lucey.
Prudential Insurance Co. of America, Newark N.J., also saw its assets grow, reporting $15.3 billion as of March 31, from about $15.1 billion a year earlier, after adjusting for an error in reporting.
Overall, the total assets of the top 50 international account managers increased to $471.3 billion from $357.6 billion. The top 50 global account managers assets grew to $151.9 billion from $114.6 billion in 1997.
The assets under management in international and global overlay strategies increased by $7.4 billion. Last year's top overlay manager, J.P. Morgan placed third this year with $14.6 billion in overlay programs, down from $22.5 billion. This year Pareto Partners topped the ranking with $16 billion and State Street Global second with $14.9 billion. Pareto and SSgA ranked second and third, respectively, in the 1997 survey.
The top five international equity draws for managers were the United Kingdom, Japan, France, Germany and Switzerland. In last year's survey, Japan had been the top draw, followed by the United Kingdom, France, Germany and the Netherlands.
The United States held its spot as top equity draw among global portfolios, while the United Kingdom again slipped past Japan to claim second. Japan came in third, followed by Germany and France, both of which also were in the top five last year.
