Emerging markets could enjoy an end-of-year surge of liquidity from pension funds increasing their exposure to the asset class.
"Emerging markets have been one of the best places to be in the last 12 months and a number of pensions and endowments are adding to their emerging markets positions," said Jeffrey Chowdhry, a portfolio manager with Foreign & Colonial Emerging Markets in London. "One large corporate pension plan with $40 billion has decided to go to 5% in emerging markets."
Mr. Chowdhry declined to identify the pension plan, but said Foreign & Colonial will get to manage the first tranche of $200 million to $300 million that the pension plan has decided to put to work in emerging markets by the end of this year. The full $2 billion is expected to be invested by the end of 2000.
Another corporate pension fund that is known to have plans to invest in emerging markets is that of Lucent Technologies Inc. Lucent had inherited around $45 billion from AT&T Co. this year. The fund has a mandate to invest around 3% in emerging markets, said a consultant familiar with the situation, and to do so by the end of the year.
The San Francisco City and County Employees' Retirement System is broadening two of its fixed-income mandates -- one domestic and one global -- both of which will in some manner provide investment avenues to emerging markets. And both are up for grabs to fund managers. The changes come as the retirement system seeks to invest opportunistically in all markets and expand beyond sector-confining mandates, said Richard Piket, senior investment officer, fixed income.
San Francisco now employs UBS Brinson and Merrill Lynch Mercury Asset Management to run its global bond portfolio, with UBS Brinson running $400 million and Mercury running $325 million.
The new board-approved global mandate and index has surfaced because of developments in the euro, Mr. Piket said. The pension fund wants to branch out from government bonds to European corporate issues, for example. As such, there will be a search for a new manager, although more than one is possible, at the end of the first quarter, Mr. Piket said. The manager would run a portion of the assets now under UBS Brinson and Mercury.
San Francisco also has $140 million with Boston-based Grantham, Mayo, Van Otterloo in an emerging markets dedicated portfolio.
On the domestic side, San Francisco is changing its domestic investment-grade corporate fixed-income portfolio now managed by Scudder Kemper Investments, to a core-plus mandate, one that can hop from sector to sector, Mr. Piket said. The portfolio also will change indexes, from the Lehman Aggregate to the Lehman Brothers Universal, which includes dollar-denominated emerging debt. The search for one or more managers, although Mr. Piket said one large manager is preferred, should bring finalists to San Francisco in mid-January.
Some pension fund consultants and fund managers see funds holding off from emerging-market investing for two reasons, never mind devoting 10% or more of their portfolios to the area. First, they are waiting to ride out Y2K, although others think the feared millennium bug is too short-term an event to affect decision-making.
While funds are expressing interest in emerging markets, they are hesitant to take the plunge and are waiting to see others head in first, one GMO fund manager said. Most emerging market funds are up more than 30% this year, the manager noted, piquing the interest of pension funds with little or no assets dedicated to the sector.
The emerging markets crisis of 1997-'98 is still fresh in the minds of those at the helm of pension funds, and the knowledge that a market moving along strongly can experience a sea change overnight still frightens investors. However, managers and consultants anticipate fund flows to emerging markets at the beginning of the year, though none would tip their hands as to which pension funds, saying only the pension funds are large.
Meanwhile, pension funds are grappling with some issues that could dictate the vehicles they will use to access the emerging markets. Large pension funds are hashing out how to come up with criteria for investing in public equity, private equity and fixed income, said Marcy Elkind, president of Elkind Economics, a Los Angeles-based pension fund consulting firm specializing in emerging markets. For example, if investing via private equity, pension funds need to figure out how to structure the deal, said Ms. Elkind, who has spoken with several of the funds.
Another topic of debate among pension funds and consultants is whether to consider emerging markets as an asset class separate from international investments and, if so, what benchmarks should be used, Ms. Elkind noted. Custody services in emerging markets add to their concerns, she said.
