After two years of soul searching, U.S. tax-exempt institutional investors are plunging back into emerging stock markets.
Nearly $1 billion is earmarked for emerging markets equities from a dozen investors, according to tracking data from Eager Manager Advisory Services, Louisville, Ky., and reporting by Pensions & Investments.
What's drawing many of them is performance -- the same issue that earlier caused them to flee or avoid the seesawing asset class.
"Performance is key," said Janet Becker-Wold, a vice president with Callan Associates in Denver. The fact that emerging markets are "the best performing asset class year-to-date doesn't hurt," she said.
Year to date through Aug. 18, the Morgan Stanley Capital International Emerging Markets Free index is up almost 42% in local currency. It finished 1998 down 22%, and was up a scant 2.7% the year before.
The high-flying 1999 returns have caught the attention of pension funds. But investors' returning to emerging markets isn't always a boon for money managers specializing in the asset class.
For example, the $7.3 billion New Mexico Public Employees Retirement Association, Santa Fe, will get exposure to emerging markets not by hiring specialty managers, but by changing benchmarks. It recently hired Oechsle International Advisers, Boston, and INVESCO, Atlanta, to run international equities. The two broad international managers are slated to invest up to 5% of the plan's total assets in international, including emerging markets.
New Mexico chose the Morgan Stanley Capital International All Country World Index (ex-U.S.) as its benchmark, said Robert Gish, director of investments.
The fund is changing the benchmark "to get some emerging markets exposure," said Mr. Gish. "Plus, it gives managers the opportunistic decision of how much and when (to invest) rather than to allocate, for example, 5% to an emerging markets specialist."
The fund's existing international manager, Capital Guardian Trust Co., Los Angeles, will continue to use the MSCI Europe Australasia Far East index. The firm has license to invest up to 10% of its portfolio in emerging markets, but historically has not reached that limit. Cap Guardian oversees $940 million for New Mexico.
The $26.1 billion Alaska Permanent Fund Corp., Juneau, is increasing its exposure to emerging markets by broadening the mandates of three money managers.
Terry Brown, chief investment officer, said Schroder Capital Management Inc., New York, -- which manages $250 million for Alaska Permanent -- will invest a portfolio 50% pegged to the MSCI Emerging Markets Free index. And, global equity managers UBS Brinson, Chicago, and Lazard Asset Management, New York, now may invest up to 5% of their portfolio in emerging markets. UBS Brinson runs $878 million for the fund; Lazard, $1.1 billion.
After Thailand's devaluation of the baht in 1997, the board waited almost two years to make these changes. This year, said Mr. Brown, the board "felt it was more appropriate. It was time to begin putting some money in those markets."
And funds are gearing up for more changes.
The $3.5 billion Alameda County Employees' Retirement Association, Oakland, Calif., is thinking of expanding its roster of emerging markets managers.
Alameda County's consultant, Watson Wyatt Investment Counsel, is writing search criteria for an emerging markets manager or managers. Betty Tse, fund analyst, said the county could put up to $100 million into the asset class if trustees approve the criteria and issue requests for proposals.
Ms. Becker-Wold of Callan said pension funds in the range of $1 billion to $5 billion want to broaden their international managers' mandates to include greater exposure to emerging markets equities.
Some pension funds are raising their international equities portfolios' exposure to emerging markets 15% or 20% from 5% or 10%, she said.
Many midsized pension funds "don't want a lot of managers" to run their international equities portfolios, she said. But if a fund gives a manager license to invest 20% in emerging markets, "you have to have a manager who knows what they're doing," she said.
But not all pension funds are rushing back into emerging markets.
The Colorado Fire and Police Association, Englewood, will not change its international investing program even though that was the focus of the board's August retreat, said Scott Laughlin, investment analyst.
Mr. Laughlin noted the board stuck with emerging markets when they hit bottom, but admitted it also "made the conscious decision not to put any more money into it."
Colorado has one active emerging markets manager, Morgan Stanley Dean Witter, New York, which runs $35.5 million, and one passive manager, State Street Global Advisors, Boston, which manages $37.5 million.
Their portfolios comprise about 12.2% of the fund's total allocation to international equities. The fund has an overall target to international equities of 25%.