The top 200 pension funds' total defined benefit international holdings stalled as global equity markets slid following Russia's August default on its local bonds.
By Sept. 30, international investments by defined benefit plans among the country's 200 largest employee benefit funds rose a market-adjusted 1.6% from a year earlier to $299.125 billion.
The Morgan Stanley Capital International Europe Australasia Far East index dropped 8.1% in the 12 months ended Sept. 30. The J.P. Morgan Non-U.S. World Government Bond index rose 11.8% in that period.
Total active international equities grew a market-adjusted 3.7%, and total indexed equities fell a market-adjusted 4.8% in the period.
The drop in equity returns, however, was cushioned for some pension funds by gains in international fixed-income portfolios.
The defined benefit funds among the top 200 saw a market-adjusted increase in total international bonds of 7%, to $46.1 billion. Actively managed inter- national bonds grew a market-adjusted 6.2% to $45.2 billion; indexed fixed-income grew to $957 million, a leap of 68.2% when adjusted for the market.
For the giant California Public Employees' Retirement System, Sacramento, which led U.S. plans with a total of $28.4 billion invested overseas as of Sept. 30, "non-U.S. fixed income did very well," said spokesman Brad Pacheco. Citing a total fund review done by consultant Wilshire Associates, he said, "international bonds and real estate carried us" for the third quarter of calendar 1998. As of Sept. 30, bonds made up 19.7% of CalPERS' international investments.
BOND RALLIES
Rallies in global bond markets, led by U.S. Treasuries, came when global markets collapsed last summer, according to Wilshire's report for the fund. After that, the "world's central banks eased the money supply, led by the U.S., lowering interest rates to prevent a full-scale recession."
CalPERS' global fixed-income portfolio saw a return of 10.2% during the third quarter, Mr. Pacheco said, adding the return for the year ended Sept. 30 was 14.9%.
Following CalPERS in the top five were: the California State Teachers' Retirement System, Sacramento, with $16.6 billion overseas; the New Jersey Division of Investment, Trenton, with $11.5 billion; the State of Wisconsin Investment Board, Madison, with $10.6 billion; and IBM Corp., Stamford, Conn., with $9.2 billion.
The United Nations Joint Staff Pension Fund, New York, which ranked No. 4 in international defined benefits investments in the previous year's survey, was reclassified in this survey as a defined contribution plan. Market-adjusted totals do not include that fund's assets.
U.S. pension funds showed interest in international bond markets for two reasons, according to bond managers and investment professionals: They needed to diversify and rebalance assets in the wake of surging domestic equity markets; and were attracted by Europe's preparations for the advent of the euro.
The New Jersey Division of Investment, for example, saw its international equity holdings drop to $7.8 billion during the third quarter of calendar 1998, while its international bond portfolio rose 7% to $3.6 billion, said Steven Kornrumpf, director. Ninety-five percent of the portfolio is "AA sovereign debt or better" from European nations including Germany and Great Britain, he said.
Active international bond managers, however, were not running all of these investments. Domestic bond managers often have discretion to invest in overseas fixed-income markets for U.S. pension plans. They account for an undetermined percentage of the reported total.
FOURTH-QUARTER REBOUND
Of course, global equity markets rebounded, and so did pension funds' investments in international equities.
One system went back into the international bond market as part of a change in investing philosophy. The Retirement Systems of Alabama, Montgomery, is "changing its way of thinking about international bonds," said Marc Green, director of equities.
The fund in early August moved back into global fixed-income markets for the first time since 1995 and invested around $150 million in sovereign credits in markets such as the United Kingdom, Germany, Australia and New Zealand, he said. That grew to around $200 million by the end of September and just under $300 million before the system sold a some of its positions and took some profits, said Allen Webb, fixed income analyst.
The point was not to buy and hold the bonds as it had in the past, but to look for "total returns" and also make some trades, said Mr. Green. Lower global interest rates also increased Alabama's movement in bond markets, he added.
The State of Wisconsin Investment Board saw its active bond portfolio jump to $3.4 billion from $2.8 billion in the year ended Sept. 30, because of an "increased allocation to the asset class and positive return," a spokeswoman said.
The Illinois Municipal Retirement Fund, Oak Brook, increased its total allocation to active international bonds by 17.9% to $660 million from $560 million. The fund increased its fixed-income allocation to bring it up to its target of 5% of total assets, said Walter Koziol, director of investments.
The fund also made the decision to actively manage its international equities and, at the end of 1997, eliminated its $2.3 billion passive portfolio, he added.
But not all investors had renewed interest in global bond markets. In fact pension funds showed little interest in foreign bond markets through the first three quarters of 1998, said Ross Youngman, director, BT Fund Management, New York.
U S WEST Investment Management Co., Englewood, Colo., which manages the $16.8 billion U S WEST pension plan, moved $150 million of the $11.7 billion defined benefit plan's assets in 1998 into U.S. fixed-income markets from emerging market and international developed market debt, said Kim Walker, president. Much of that movement came from tactical allocations by global bond managers, she said. She added much of the decrease came in non-dollar inflation-linked bonds. The total drop in U S WEST's active international bond holding was to $332 million from $609 million, or 45%.
