On the back of rebounding equity markets in the closing months of 1998, pension funds around the world produced strong returns for the year.
Their returns, however, were not as dazzling as 1997's, according to leading consultants providing data to Pension & Investments. In fact, returns for pension plans fell in most countries compared with the earlier returns.
The United States had the highest median return, 14.6%, according to preliminary data run by Callan Associates Inc., San Francisco. But that was down from the stellar 18.9% return of the previous year.
Falling behind the pack were Japanese pension plans, which saw median returns of -3.2%, according to Frank Russell Co.'s London office. That's compared with 1997's modest median gain of 3.1%.
Global stock markets surged in the final quarter of 1998, turning a year of potentially modest growth into the double digits for many funds.
The Standard & Poor's 500 stock index was up 6% through the first three quarters of 1998, but surged in the fourth quarter and was up 21.3% in the last quarter leaving it with a 26.7% gain for the year.
The Morgan Stanley Capital International Europe Australasia Far East index showed a similar pattern. It was down 0.3% through September, but finished the year with a net gain of 20%.
U.K. pension funds earned an average return of 14.4%, vs. 1997's 16.8%. Swiss funds had a median return of 10.44%, compared with 16.4%. The Canadian pension fund median was 8.7%, vs. 15.3%, according to the consultants.
Australian corporate funds had returns of 12.3%, while Australian industry funds returned 10.9%, down from 14.3% and 11.8%, respectively in 1997.
Consultants pointed to the fourth-quarter rebound as the year's saving grace.
"Once again, equity markets, especially in the U.S., were the main source for positive returns," said John Stannard, managing director of Frank Russell in London. "This comes despite the market correction in the third quarter and widespread fears of global recession."
Although not spectacular, returns were strong.
"At the start of the year, few people were predicting that returns in 1998 would be so high," said Peter Warrington, executive director of The WM Co., a subsidiary of Bankers Trust in Edinburgh, Scotland.
"It was a year of exceptional swings with quarterly returns varying dramatically from over 13% in the fourth quarter to -10% in the third."
Callan estimated that mean asset allocations of U.S. pension funds were: 46.8% domestic equity; 35.5%, domestic fixed income; 9.7% international equity; 1.2% international fixed income; 1.9% cash; 2% real estate; 1.5% other; and 1.2% domestic balanced.
Equity investments in the United Kingdom produced an average return of 12.6% last year for U.K. funds, according to WM. Overseas equities showed gains of 19% for U.K. pension plans.
U.K. plans are heavily weighted in equities. The WM estimated the asset mix for U.K. plans was 50.5% U.K. equities and 20.7% in overseas equities.
Australia's separately managed defined benefit plans gained from their exposure to international equities, which returned 32.6% in Australian dollar terms last year. The defined benefit plans had a weighting of 14% to the asset class.
In comparison, separately managed Australian industrywide plans had only 8% of assets invested in international equities. All asset weightings were effective through Sept. 30 of last year, said Brian Hender, a consultant with John A. Nolan & Associates Pty. Ltd., Victoria, Australia. Allocations were based on asset-weighted data for major funds advised by the firm, he said. Returns were based on actual returns through November and estimates for December, he said.
Strong fourth-quarter returns of 10.4% helped give Canadian pension funds an estimated median return of 8.7% in Canadian dollars, according to data supplied by Frank Russell Co. Through Sept. 30, those same funds had a median return of -1.6%.
Canadian and U.S. equity made up 31.6% and 9%, respectively, of assets under management for Canadian pension funds, according to the consultant's estimates. Pension plans' exposure to Canadian equities returned 16% and U.S. equity returns were 21.3% during the fourth quarter.
Fixed income was a mean-weighted 36.9% for Canada's pension funds and had returns of 1.9%. The median Canadian pension fund had a little more than 5% invested in the Toronto Stock exchange.
A similar turn of markets in the fourth quarter of last year helped boost Swiss pension funds to 10.4% returns. Through Sept. 30, Swiss funds had median gains of a little less than 1.5%.
Swiss pension funds have a mean of 19.9% of assets in Swiss equity, and weight foreign equity at 15.9%, according to Frank Russell.
Swiss equity markets rose 21.8% in the fourth quarter, according to Frank Russell, while Swiss bonds, which account for a mean 41.3% of plans' assets, rose 2.2%.
Swiss pension funds operate under investment restrictions that allow a maximum of 30% of assets in domestic and foreign stock markets.
MODEST GAIN IN JAPAN
Japanese pension funds, meanwhile, saw a modest median gain of 1.9% in yen terms during the fourth quarter after suffering through returns of -5% through Sept. 30.
The estimated median annual return of -3.2% was created by weak performance in Japanese pension funds' two largest asset classes. Japanese equity and bonds account for 34.6% and 25.6% of pension funds assets, according to Frank Russell. The two groups, respectively, returned 4.4% and -4.9% during the fourth quarter.
Fourth-quarter returns for Canadian, Swiss and Japanese funds were estimates based on weightings in the third quarter and returns in the fourth, according to the consultant.