The State of Florida Board of Administration will shift $4 billion this month from domestic to international equities, marking the largest shift among several public pension funds that are upping their foreign equity allocations.
Some of the funds are adding one or two percentage points to their allocations, others are opting for slightly greater boosts.
Among the funds are: the School Employees' Retirement System of Ohio, Columbus; Teachers' Retirement System of the State of Illinois, Springfield; State of Connecticut Retirement & Trust Funds, Hartford; and Montgomery County Retirement System, Rockville, Md.
Reductions in domestic equity allocations are funding many of the moves, most of which occurred after asset allocation studies.
Funding for the switches will hit managers and international equity markets over periods of time.
The moves came for a few reasons, one consultant said. "Why 1999? So far, EAFE has outperformed the S&P 500," said Patrick Rudden, managing director, director of equity research with BARRA RogersCasey in Darien, Conn. "Japan has been very strong, and valuations in the U.S. are overstretched."
As of Nov. 8, the Morgan Stanley Capital International Europe Australasia Far East index was up 11.9% for the year to date, while the Standard & Poor's 500 was up 11.5%. Japan's Nikkei 225 was up 32.6%.
`Good diversifiers'
Asset allocation studies can almost always lead to calls for greater diversification, Mr. Rudden said. And international investments are good diversifiers, he added.
Another factor in the new allocations is legal. A couple of the funds -- Florida and Montgomery County -- are making the moves following recent government legislation that loosens restrictions on the amount the funds can invest overseas. The Florida Board is upping its international equity exposure to 12% of the fund from 8%, and Montgomery Retirement is moving to 13% from 10%.
The $98 billion Florida Board, Tallahassee, will cut domestic equities to 55% from 58% and cut domestic fixed income to 25% from 26%.
The move is not spurring manager searches. Instead, the fund is giving its seven international developed-markets managers bigger cuts of its assets, said Scott Seery, chief of international equities.
The fund is investing $2 billion with its passive manager, Barclays Global Investors. Mr. Seery said. It's investing close to $340 million with each of its current active developed-markets managers.
Those managers are: Morgan Stanley Asset Management; Templeton International; Sprucegrove Investment Management Ltd.; Putnam Investments Inc.; Capital Guardian Trust Co.; and Blairlogie Capital Management.
Florida is not increasing its allocation to emerging markets, Mr. Seery said. Its new benchmark, the MSCI All Country World index ex-U.S., currently calls for a market-cap weighting of 10% for emerging markets rather than the fund's level strategic weighting of 15% before the reallocation.
The $22 billion Illinois Teachers fund upped its exposure to international equities to 20% of the fund from 14%. Officials have not yet started to shift assets to international managers, said Mark Caplinger, chief investment officer, but are likely to do so in the next few months. No date for issuing an RFP has been set.
The plan decided to take money away from domestic equities to diversify the portfolio following an asset allocation study, he said.
In a smaller move, the $1.8 billion Montgomery County Employees Retirement System upped its international equity exposure to 13% of the fund from 10% in July.
At that time, it invested $60 million in a passive EAFE fund with State Street Global Advisers. Funding came from an over-exposure to domestic managers, said Patrick Bell, director of pension investments.
But the pension fund is committed to investing with an active manager. "We're not doing much to find a new manager until next year," he said. "But we wanted the exposure (to international markets) this year."
The fund has sent a request for proposals to 22 managers, he said.
At other large funds, the increases also followed asset allocation studies. The $7.9 billion Ohio School fund increased its allocation to international equities to 16% of the fund from 15% in the summer.
But the change has not resulted in a flow of cash to international equity managers because the system was already overweighted in international equities because of their performance this year, said Doug Sisson, director of investments for the $7.9 billion fund.
The fund bought $120 million of domestic equities at the end of September, when U.S. markets fell, to rebalance the portfolio.
Last month the board unified the developed- and emerging-markets portions of the $1.3 billion international equity portfolio.
Ohio School changed the benchmark for the portfolio to the MSCI All-Country World index ex-U.S., said Mr. Sisson.
The benchmarks for the portfolio prior to the move had been the MSCI EAFE index and the Emerging Markets Free index.
The change will require the fund to take less action to rebalance the international portfolio, Mr. Sisson said.
It is spurring "general discussion" by investment staff about the need to search for another emerging markets manager, he said. If staff does propose a manager search, it won't be until next spring, he added.
And the $20 billion State of Connecticut Retirement & Trust Funds, Hartford, recently endorsed a new asset mix that boosts its exposure to international equities to 18% of the fund from 15%.
Corporate funds, which typically have greater allocations than public ones to both domestic and international equities, appear to be standing pat.
General Motors Investment Management Corp., which oversees the $78 billion defined benefit plan for General Motors, is holding its non-U.S. target steady at 20%, said Allen Reed, president and chief executive officer of General Motors Investment Management Corp., New York. Its non-U.S. assets total a little more than $15 billion.
U S WEST Investment Management Co., Englewood, Colo., which runs the $13 billion defined benefit plan for U S WEST Inc., is also holding its 22% exposure to international equities, said Kim Walker, president.
