Searches for international managers were up in the fourth quarter, as U.S. pension funds ended the year with a fresh look overseas.
According to Pensions & Investments data, there were 29 searches reported in October and November, compared with 13 reported in the first quarter of the year.
From reallocating assets to shuffling styles of mandates to issuing RFPs, funds have been busy this quarter. A number of major funds, which run on five-year investment cycles, also are in the process of making moves.
The "five-year" funds include:
*The Washington State Investment Board, which started December by looking for "multiple managers" to run its revamped international equities portfolio, valued around $4.8 billion;
*The California Public Employees' Retirement System, which ended the year by gearing up to search for international equity and fixed-income managers in 1999; and
Pension fund executives, money managers and consultants offer a smattering of reasons for the activity. Some say funds are reallocating to international equities because of the renewed growth in U.S. markets. Others point to funds switching to broad, EAFE-style mandates from regional accounts, and vice versa.
"I don't know if it's more activity. There's certainly some activity out there," said Jim Waterman, senior vice president with InterSec Research Corp. in Stamford, Conn. "The trend has been going on for some time. It's related to a rebalancing process.
"Fund managers are aware of how strong U.S. markets have been."
The end of the year is an appropriate time for the funds to invest internationally, he said. The up and down U.S. markets of 1998 have caused the pension funds "to step up to the plate now that things are not so scary out there."
He stressed recent changes in international investing are "typically part of a natural . . . process for some of these plans." And that often depends upon a plan's history with international investing.
The Washington State Investment Board, Olympia, is one such fund. Near the end of its five-year investment cycle, the $46 billion fund is in the market for a variety of managers that will meet the demands of its new benchmark, the Morgan Stanley Capital International All Country World Index ex-U.S. index, said Christopher Ailman, chief investment officer.
The change is mandated, explained Mr. Ailman. "Due to state rules, we run on five-year contracts. All our international equity contracts expire in June" of next year, he said.
"Poor aggregate performance" is another reason for the system overhauling its international equities program, Mr. Ailman said. That's "partially due to managers, but mostly due to structure."
Before adopting the ACWI ex-U.S. index, the fund's commitment to international equities, which is around 10% of the fund, was divided evenly between European and Far Eastern equities, he said. Now, Washington State "has scrapped regional" investing "for more of a broad, non-U.S. look at the world.
"We've scrapped fixed weights for more of a cap-weight structure. It's awfully hard to argue the mean would be 50% Asia, 50% Europe."
The fund reviewed its domestic equity program last year, and is planning to look at its fixed-income program in 1999.
Meanwhile, the California Public Employees' Retirement System, Sacramento, just spent the year overhauling its domestic equities program and is gearing up now for a review of its international portfolio. The $141 billion fund is "preparing to do a whole restructuring of the international investing program," said Brad Pacheco, spokesman.
CalPERS hired 15 international money managers in 1993. Two have been terminated since, and the five-year contracts for the others expired earlier this year but were renewed for one year.
The process will begin in February when the investment office presents a strategic review to the board, Mr. Pacheco said. RFPs for international equities and international fixed-income managers are slated to follow in May. Mr. Pacheco said it was too early to tell how many managers CalPERS might hire.
It hopes to finish the process and hire managers by March 2000, Mr. Pacheco said. He stressed this was not a change in the fund's asset allocation to international equities or bonds. CalPERS' current asset allocation calls for a 20% exposure to international equities and 4% to international fixed income.
"We haven't done this for a long time," Mr. Pacheco said. "There's a lot of talent out there we need to meet."
The Illinois State Board of Investment, Chicago, also at the end of a five-year cycle, is reviewing its international equity strategy, said Ron Schmitz, chief investment officer for the $7.3 billion fund. The fund decided in September to change to the ACWI ex-U.S. index from two separate mandates, the MSCI Europe Australasia Far East index and the MSCI World index. Hence the hiring of Hewitt to look at its $1.5 billion portfolio.
Mr. Schmitz believes the change in indexes will require at least one change in managers.
"At least one global manager is best left at global" investing, he said.
The ACWI ex-U.S. index has a weighting of about 8% to emerging markets. Some of Illinois' international managers don't run emerging markets equities, Mr. Schmitz said.
One plan's increased exposure to international equities was strategic. The Tacoma (Wash.) Employees' Retirement System added another international equity manager at the start of the month. TT International Investment Management, London, will actively manage $40 million in international equities, said Patricia Pabst, director for the $555 million fund.
The $40 million slated to TT International increases the fund's exposure to international equities by 50%.
"In reviewing the asset allocation plan, strategically the board of administration was looking for a growth, value international fund to complement their passive international fund with Bankers Trust," she said.
BT passively manages about $40 million for the fund, while Edinburgh Fund Managers actively manages about $40 million in international equities, she said. Funding is coming from asset allocation shifts.
And some funds are wrapping up business started earlier in the year. The Teachers' Retirement System of the City of New York was scheduled to interview seven international equity managers in the middle of the month, said Richard Halverson, deputy director of pensions.
The $23 billion fund is finishing up the process that began in June when it decided to raise its international equity allocation to 15% of the fund from 10.7%. The allocation could rise to about $3.5 billion from its current $2.5 billion. Historically, the performance of international equities would strengthen the fund, he said.
"It's part of the fund's movement to diversify from domestic equity and fixed income."
Orange & Rockland Utilities, Pearl River, N.Y., picked Templeton Investment Counsel at the beginning of the month to manage $13 million in international equities for its defined benefit plan. The move, said John Finnegan, assistant treasurer for the $260 million fund, was finishing a process started at the beginning of the year when it changed its asset allocation, boosting equities to 60% from 50% of the fund and decreasing fixed income to 40% from 50%.
The addition took awhile because Orange & Rockland staff had extra work this year, he said, and the treasury office had a variety of administrative and financial analysis to complete for the company's merger with Consolidated Edison.
The fund's staff was determined to hire a manager, Mr. Finnegan said. "Come hell or high water, we'd get it done by year's end."