New Jersey Division of Investment, Trenton, and Teachers Retirement System of Texas, Austin, have been busy stocking their international equity portfolios with cyclicals such as petrochemical, mining and paper companies.
While Texas Teachers doesn't comment on its investments, New Jersey has been buying because it's predicting increased demand as global economies recover.
Over the past two years, commodities prices have been hit hard as markets from Thailand to Russia were hit with economic tumult. The price of oil and other commodities, however, has recently rebounded, with oil's rise among the most dramatic. It traded above $25 per barrel on Sept. 29, its highest level since January 1997. Oil closed at $22.30 per barrel on Oct. 12.
Investors' moves apparently came at the right time. Through the end of September, Morgan Stanley Capital International's global energy and metal indexes have seen big gains. As of Sept. 30, the MSCI World Energy Sources, ex-U.S., index was up 23.5% for the year, while the MSCI World Metal Non-Ferrous ex-U.S. index was up close to 50%. In comparison, the MSCI EAFE index was up 8.75% through year-to-date through Sept. 30.
The $75 billion New Jersey system bought cyclical companies in two phases: one in December and January, the other in June. "The market was underestimating the effect of global growth on these companies," said Gilles Michel, assistant director.
Companies in New Jersey's $11.5 billion international equity portfolio include: Swedish stainless steel producer Avesta Shefield AB; Finnish metal maker Outokumpu Oy; and several Scandinavian paper companies.
There was a sell off in many cyclicals due to profit taking in June, he said, but New Jersey chose to stick to its strategy and added to many of its positions. The main reason is the pension fund is predicting overall global growth at or above 3% in 2000. Paper, energy and metals companies stand to gain, he said. "It was wrong to sell cyclicals on the basis of what the stock price did in the second half," he said.
Some cyclical companies, such as Australia's oil and metal giant Broken Hill Proprietary Co. Ltd., Melbourne, are attractive because they have just finished restructuring.
The $81.7 billion Texas Teachers has exposure to a handful of international cyclicals through American depository receipts that had a market value of $83.1 million near the end of last month.
Texas Teachers' holdings included as of mid-September 440,060 shares of Broken Hill Proprietary, worth $10.2 million; Spain's Repsol SA, a petrochemical company, with 1.2 million shares, worth a total of $23.8 million; the U.K.'s Rio Tinto, a mining company, with 136,200 shares, worth $9.4 million; Italy's ENI Spa, which produces oil and natural gas, with 435,000 shares, worth $26 million; and France's Total Fina SA, an oil producer, with 225,263 shares, worth $13.7 million.
And pension funds' ardor for oil stocks has not been confined to overseas companies. Herbert Dyer, the executive director of the $51 billion State Teachers Retirement System of Ohio, Columbus, said that the fund's domestic portfolio has been "heavily into oils for a long time."