U.S. pension funds remain overwhelmingly committed to investing internationally, although many are approaching new investment abroad with a caution that didn't exist before the slump that began in mid-July.
One illustration of that new caution: Nearly one-fifth of those responding to a Pensions & Investments fax poll said they are less interested now in emerging markets investing than they were before the global economic and market turmoil.
Still, all of the pension fund officials surveyed said international investing is valid and adds diversification benefits to an equity investment program.
"This too shall pass!" concluded one pension fund executive.
But many said they were pulling back from targets set before U.S. and European markets peaked this summer.
As for emerging markets, only 3.4% of respondents said their interest in that area had increased, and 17% said they had reduced commitments to emerging markets.
One pension fund executive said the crisis in emerging markets had changed his attitude about investing in them because of a new "recognition of volatility." Another said he now plans to "combine emerging markets and developed markets into a single fund."
But only widespread disaster such as war and the fall of governments could keep U.S. pension funds away from international markets.
From its high of 6179 on July 20, the FTSE 100 index fell 24.8%, to a low of 4648.7 Oct. 5. It closed Oct. 15 at 5056.3.
In the same period, the Morgan Stanley Capital International Europe Australasia Far East index has fallen, in dollar terms, to 1095.2 from 1452, a drop of 24.6%. The EAFE index closed a shade below 1210 Oct. 14.
Many U.S. funds appear to be pulling back from targets set earlier this year. And some had decreased the amounts they were considering investing in global equities before the markets' selloff.
The $19 billion United Nations Joint Staff Pension Fund, New York, decided not to boost its holding in global equities in September to meet its target for the quarter, said Henry Ouma, chief of investment management service.
The fund makes targets each quarter within a long-range allocation, he said. The third quarter target for global equities was 63% of the fund. But, fund officials decided in September to hold at 61% because of volatile markets.
It ended the third quarter up one percentage point overweight its target in fixed income and cash, at 29% and 5%, respectively. The remaining 5% was in real estate, Mr. Ouma added.
He said the fund's strategy is to invest in specific stocks, rather than sectors or countries.
The collapse has affected how and when funds will invest in the future.
The $22 billion Retirement Systems of Alabama, Montgomery, remains committed to international equities but is taking a wait-and-see approach to further investments, said Marc Green, director of equities.
"Of the total fund, between 2.5% and 3%" is in international equities, he said, down from a high of 8% at the start of July.
At that time, the fund decided to liquidate its far Eastern exposure and cut its European holding in half, he said. "Our growing concern was out of Asia. Japan wasn't doing the right things and we had losses with currency" because the fund didn't hedge, Mr. Green said.
The fund sold all of its positions in the Far East except for Australia, and sold into the European market in order to offset losses with gains from Europe, he said.
The pension fund's staff picks the countries and the sectors, while Morgan Stanley Asset Management picks the stocks, he added.
Such ups and downs are making Alabama fund officials approach the next round of international investing with caution, he said. The option to invest internationally is "still available to us," he said, adding the fund won't make that commitment at least until the new year.
The fund is "not quick to pull the trigger. We're in a holding pattern for the remainder of the quarter."
Another pension fund decided at the start of October to hire an outside, active European equity manager for the first time after watching its international portfolio drop. The $3.5 billion pension plan of the Montana Board of Investments, Helena, hired Pyrford International PLC, New York, to manage $35 million in European, large-cap equities because of "a belief that an external manager will do better," said Chuck Hunter, senior portfolio manager.
Before hiring Pyrford, the Montana Board ran its European equities -- all actively managed --in-house, Mr. Hunter said. The fund had $66 million in European equities during the first week of October, down from $82 million before the market's slide started.
The fund's current and future international active management is restricted to Europe, Mr. he said.
The fund could increase Pyrford's allocation to $50 million by the end of next June; the portfolio was funded from cash.
Despite the recent hiring, the slump in markets has "made us slow down the process" of investing overseas, Mr. Hunter said. Montana, with 4.7% invested overseas, is "somewhat behind" its target of 10% set two years ago through an asset allocation study, which "would have been an aggressive amount," he said.
EXPOSURE WITHOUT RISK
And some pension fund executives said the globalization of U.S. companies such as Coca-Cola Co. gave investors international exposure without the risk of volatile markets.
Within large-cap, domestic equities, 30% of a company's earnings can come from international holdings, said Marc Puckett, director of finance and pension fund administrator for the $850 million Flint (Mich.) Employees' Retirement System.
The line between international and domestic equities "has become grayed," he said. The fund decided last month to raise its exposure to international equities, but not by as much as it had once discussed, Mr. Puckett said.
The fund was convinced it was getting substantial exposure to international markets through investing in domestic large caps with worldwide operations.
"But with domestic equity names, you don't have that volatility" of international markets that recently have gained or lost 3% to 5% each day.
Its consultant, Callan Associates, "had suggested we increase international equity exposure." Mr. Puckett declined to specify the plans Callan presented as well as the amount it had recommended for investment.
Flint fund had about 3% of its portfolio in international equities and will most likely increase that to 5%, he said. The fund was "considering greater, but it pulled back," he said. Mr. Puckett added the fund would "most likely" stay with its current international equities manager, Investment Advisors Inc., Minneapolis.