The volatility in the world markets isn't scaring away U.S. pension funds.
With many foreign markets taking a dive, some funds that invest internationally -- and others just getting into international markets -- are staying the course.
As of Sept. 16, Japan's Nikkei 225 had fallen 10% for the year, and Brazil's Bolsa dropped 32.7%.
But European markets are roaring, with the Bloomberg 500 index up close to 28% for the year as of Sept. 16. The index, however, fell 19.2% to 183.21 between that date and its July 20 high of 226.81.
The year's positive return in Europe prompted the Michigan Department of Treasury, Lansing, which oversees the $40 billion State of Michigan Retirement Systems, to overweight its international equity index account in Europe and underweight in Asia, said Alan Van Noord, director. The portfolio is pegged to the Salomon Smith Barney Broad Market Index Europe Asia Pacific composite, and is "slightly skewed to Europe," he said. The fund has 78.1% of its international assets in Europe vs. the benchmark's weighting of 77.5%. The fund is underweight in Asia, investing 21.9% of its overseas assets vs. the benchmark's weighting of 22.5%.
The fund has $2.2 billion -- or 5% of its total assets -- in international equities, Mr. Van Noord said. Over the next five years, the Michigan fund will increase its international exposure to 7.5% of assets.
"It's a diversification move," Mr. Van Noord said. International investing has shown "good rates of return over the past couple of years."
The drop in some international markets has not dissuaded the $270 million Merced County Employees' Retirement System, Merced, Calif., from its search for an active international equity manager. The board should pick a manager by mid-October, said Bill Smith, plan administrator. The goal is to invest 6% of the fund in international equities.
"We hope to be actively out there in the market in 90 days," Mr. Smith said. "We're a small system in a relatively rural area. This is a big step for us."
Another novice investor in international markets agreed. "Just because markets go haywire" doesn't mean you don't go ahead with a plan to invest overseas, said Craig Slaughter, executive director with the $4.5 billion West Virginia Investment Management Board, Charleston, which decided in January to invest 15% of the fund in active international equity portfolios. The change should be accomplished in two years.
"We realize a lot of markets are not particularly attractive," he said. "If you can tell me when the bottom's going to hit, I'll hold off."
Searches for international managers, "have picked up from last year and surged in the middle of the year," said Andrew Rasmusen, principal with William M. Mercer Investment Consulting Inc., Chicago.
In 1997, Mercer had a total of 25 searches for international money managers, 23 for EAFE managers and one each for small-cap and emerging markets. This year, it had seen 31 searches through last month, Mr. Rasmusen said, with 25 of those EAFE mandates and six in emerging markets.
Pension funds are not market timers but long-term investors, and therefore must come to expect market slides, many pension fund executives said.
The $77 billion New York State Teachers' Retirement Association, Albany, reviewed its asset allocation in July and decided it would search for active international equity managers, said Candace Ronesi, spokeswoman. It has not changed its plan to allocate up to $1 billion to active managers and should decide by the end of October, she said.
"We're long-term, strategic investors, not tactical investors," Ms. Ronesi said.
Some might rethink investing in global bonds.
The $735 million Marin County Employees' Retirement Association, San Rafael, Calif., has not canceled its search for a global bond manager. But the board is looking at whether the decision is "appropriate," said Norman Klein, retirement administrator. The plan is looking to have ultimately 5% of the fund in global bonds.
"But the board wants to take a look at the wisdom of having a global fixed exposure," he said, adding it would decide by mid-November.
The $105 billion New York State Common Retirement System, Albany, last month cut $821 million from global bonds, switching to an internally managed domestic fixed-income portfolio.
The yearlong slumps in Asia and Latin America and the recent downturn in Europe have not prevented investors from moving into markets, pension funds executives say. But at least one U.S. pension fund recently changed its investment strategy.
The $3.5 billion Arkansas Public Employees Retirement System, Little Rock, terminated four managers to streamline its international equities line at the start of the month, said Bill Van Cleve, executive director.
The decision was a result of the turbulence in international markets, he said.
BEA Associates, Nomura Asset Management, Bankers Trust and UBS ran a total of $140 million, Mr. Van Cleve said. That money was assigned to Arkansas Public's two remaining international managers, American Express Asset Management and Brinson Partners.