Actively managed international equities portfolios -- in both developed and emerging markets -- helped U.S. pension funds beat their benchmarks in the second quarter.
Pension funds such as the New York State Teachers' Retirement System, Teacher Retirement System of Texas and New Jersey Division of Investments reported returns between 3.1% and 3.7% in their international equity portfolios for the three months ended June 30.
The Morgan Stanley Capital International Europe Australasia Far East index returned 2.5% in the second quarter. The MSCI Emerging Markets Free index returned 24.4%.
In a turnaround, international managers widened their lead against the EAFE. In the second quarter, the median international equity manager had a return of 4.8%, according to the Pensions & Investments' Performance Evaluation Report.
In contrast, in the first quarter, the EAFE's 1.5% return slightly lagged the median international manager's return of 1.7%.
Some of the change came from the surge in emerging markets.
"Anybody who had anything there got the benefit," said Jeff Nipp, head of investment research, Watson Wyatt Worldwide in Atlanta. Value and small-cap stocks also did well in the second quarter, he said.
Active international managers -- and not the EAFE index, which is limited to developed markets -- commonly have biases to such stocks, he said.
Eighty-seven percent of active managers beat the index last quarter, he said.
For the 12 months ended June 30, the EAFE returned 7.9%. Mr. Nipp said 44% of the managers were above the median in that period. The median international equity fund in the PIPER universe earned 6.8% in that time period.
Active international managers recently have been in a slump. Through much of the '90s, they could outperform the EAFE index by underweighting Japan and overweighting Europe. When Japan's market rebounded last year, some managers were caught flat-footed.
While the EAFE index does not include stocks from emerging markets, active managers often have license from clients to take positions in emerging countries.
The MSCI All Country World index (ex-U.S.), however, does include emerging markets. It returned 5.2% for the second quarter. At the start of April, the index had a 9.4% exposure to emerging markets; three months later, emerging markets equities comprised 11.75%.
Pension fund executives were heartened by the strong numbers.
The recovery in international markets has broadened, and value managers were able to make a comeback, said Scott Seery, chief of international equities, State Board of Administration of Florida, Tallahassee.
The $98 billion fund has $8 billion in international equities, split evenly among two index managers and 13 active managers. The $4 billion active portfolio had a total return of 9.5% in the second quarter.
Last year, large-cap stocks such as Finland's Nokia Corp., the Swiss Novartis and British Colt Telecom Group PLC led the market, he said. Value-oriented managers often missed out on those stocks because of their high prices, he said.
A big boost for Florida came from its five emerging markets managers, which run $1.2 billion or 15% of the fund's international equity portfolio. The portfolio didn't beat the benchmark because of underweighting in Asia but still returned close to 21%.
The New York State Teachers' Retirement System, Albany, saw its active international managers, which run $1.67 billion in international equities, beat the EAFE index for the quarter with a return of 3.8%, said Candice Ronesi, a spokeswoman for the $85.4 billion fund.
But its emerging markets portfolio, with $689 million in assets, lagged its benchmark, the Emerging Markets Free index, slightly during the second quarter, returning 22.2%. The total international equity portfolio has $7 billion in assets and returned 3.1% for the quarter.
Leading pension funds that manage international equities in house also outperformed the index.
The Teacher Retirement System of Texas, Austin, which has no emerging markets stocks, returned 3.5% for the quarter. The $80.7 billion fund has an international equities portfolio of $7.4 billion, with $5.2 billion run actively, said spokesman Howard Goldman.
The New Jersey Division of Investments, Trenton, had a return of 3.72% for the quarter. The fund has total assets of $76.2 billion and international assets of $10.6 billion, with no exposure to emerging markets.
