U.S. pension funds cautiously are taking another look at domestic and international bond markets.
Recovering from last summer's roller coaster bond markets, sponsors from Boston to Los Angeles have been busy wrapping up or beginning manager searches, terminating managers or handing more assets over to existing managers.
The changes come in a range of styles, from pure international plays to core-plus accounts that include some exposure to U.S. high-yield debt or emerging markets.
Los Angeles County Employees' Retirement Association terminated UBS Brinson and Capital Guardian Trust Co. last month and hired Bridgewater Associates to run the $600 million in international bonds the two had managed.
The Texas A&M University System, College Park, also last month, handed $130 million in assets to Payden & Rygel after terminating Smith, Graham & Co. Asset Managers LP.
And the $22 billion Retirement System of Alabama, Montgomery, invested $10 million in U.K. gilts in early January.
Money managers and pension fund executives point to the recent relative calm in international markets for some of the activity. They say institutional investors have shied away from putting new money overseas after Russia's default on its local bonds and the near collapse of Long-Term Capital Management, the hedge fund that had bet heavily on high-risk securities.
"Prior to the summer, everyone wanted to get into core-plus," said Juan Almaguer, senior investment officer, fixed income, with the $28 billion Los Angeles County fund. After the debacle, yield spreads widened and investors lost money, he said, adding it "caused people to rethink their strategies."
Move into high yield
Mr. Almaguer said the system's core-plus managers "are little by little" putting more money into domestic high yield, non-U.S. sovereigns and emerging market debt.
Los Angeles County, with $9 billion in fixed-income assets, has a $1.8 billion slice of its total bond portfolio dedicated to international bonds. It uses the Salomon non-U.S. government bond index, and is 50% hedged.
Some pension plans are investing in global bond accounts to diversify their portfolios. National Fuel Gas Co., Buffalo, with $520 million in pension defined benefit assets, hired Brandywine Asset Management at the start of March to run $25 million in global bonds. It's the plan's first allocation to the asset class, said Barry Cope, manager, trust investments.
The fund had the cash after a 10-year guaranteed investment contract matured, and the plan made the move for greater diversification.
Brandywine can have as much as 20% of the account invested in emerging markets, he said.
Other pension fund officials said they were looking to take advantage of the changes in the European bond markets, which are becoming less diverse in the wake of the euro.
The $3 billion San Bernardino (Calif.) County Employees' Retirement Association reduced its exposure to global bonds to 5% from 10% of its total portfolio. At the end of 1998, the fund reduced the assets managed by Scudder Kemper Investments Inc. in a global fixed-income account. This year, it issued an RFP for a global fixed-income, core-plus manager. In Europe, "asset-backed securities and corporates are getting bigger," said Tim Barrett, chief investment officer. "We wanted a manager with the resources to look at spread products."
The new mandate, which will total close to $150 million, is meant to add to the fund's returns and expand the type of fixed-income security its manager can hold, he said.
San Bernardino also pumped more money into the U.S. high-yield market. One percentage point of the fund's reduction went to its domestic equity allocation, while the remainder was divvied up by its domestic core-plus managers, Bradford & Marzec Inc. and BlackRock Inc. The two have license, respectively, to invest up to 20% and 10% in high-yield bonds, Mr. Barrett said.
Some pension fund executives said the collapse in Russia that spread to markets in Latin America only confirmed the heavy risk pension plans face when investing in overseas bond markets.
The City of Hartford (Conn.) Municipal Employees' Retirement Fund changed its strategy to start investing in overseas bonds shortly before the markets collapsed, said Kathleen Palm, city treasurer and secretary of the pension commission. Last summer, it decided to search for a global bond manager, its first exposure to bond markets overseas. "A top-notch manager should be given the flexibility to manage international and domestic bonds, given the uncertainty in global markets."
The $975 million plan is running an in-house search for a global fixed-income manager to run a $40 million account, she said, and should make its decision by June.