Leading U.S. pension funds poured big bucks into overseas stock markets last year, with a record number holding at least $1 billion in actively managed, international equity portfolios.
As of Sept. 30, 66 of the top 200 pension funds reported $1 billion or more in actively managed international equity portfolios in their defined benefit plans, an increase of more than 40% from a year earlier.
The active, international equity portfolios of the 200 largest employees benefit funds rose to a shade less than $252 billion, a market-adjusted increase of 13% from a year earlier.
The Morgan Stanley Capital International Europe Australasia Far East index shot up 31.3% in the 12 months that ended Sept. 30.
International bond holdings also fared well in the face of weak global bond markets.
The top 200 reported $51.2 billion in non-U.S. fixed-income assets. That's a healthy rise of 12% from a year earlier, when adjusted for the scant 1.5% increase in the Salomon Non-U.S. World Government Bond index.
U.S. pension funds saw their active international equity holdings take off last year as markets from Japan to France boomed.
Pension funds were busy hiring active managers as well as giving existing managers more assets. Many pension funds increased the weight of international equities in their asset mixes.
The top 200 defined benefit plans recorded a total aggregate weighting of 14.2% in 1999 to both passive and active international equities vs. 12.1% a year earlier.
And the moves paid off. The MSCI World index, ex-U.S. rose 26.2%, while its Emerging Markets index leapt 56.5% during the period.
Despite the rebound, defined benefit assets of the top 200 pension funds with equity investments in emerging markets stocks actually dropped 3%, after being adjusted for market gains.
Last year was the reverse of 1998, when pension funds' international bond holdings cushioned the fall in stock markets worldwide after the Russian government defaulted on its bonds and the near collapse of hedge fund Long Term Capital Management. Equity markets worldwide outperformed the United States in calendar 1999.
The S&P 500 was up 21% in 1999. Japan's Nikkei 225 was up 36.8% and France's CAC-40 was up 51.1%.
The New Mexico Public Employees Retirement Association, Santa Fe, was one fund touching the $1 billion mark in active international stocks for the first time. It hit the mark through a variety of strategies.
The $7.5 billion fund hired and funded two managers, Oechsle International Advisors and INVESCO, to run portfolios against the ACWI ex-U.S. benchmark, which includes stocks in emerging markets and Canada. Its only other international manager, Capital Guardian, beat the EAFE index by a wide margin with a 70% return for the calendar year, more than doubling the index, said Robert Gish, director of investments.
In the process, its allocation to international equities jumped to 13.6% as of Sept. 30, from 8% a year earlier. As of Sept. 30, 1998, the fund reported $518 million in overseas stocks.
And its overseas stocks, which are all actively managed, closed 1999 at a more impressive mark --$1.6 billion.
"The strategy obviously worked well in our case," said Mr. Gish.
In total, the plan sponsor allocated $425 million to its two new international managers, with funding from U.S. equity managers. It also moved $100 million from Capital Guardian's account to fund the new mandates. The three managers generated about $550 million in returns between the summer of 1998 to the end of 1999.
Another fund saw the payoff while running its assets in-house. The New Jersey Division of Investment, for the second consecutive year was the pension fund reporting the largest amount of assets actively invested in equity markets overseas.
The $74.9 billion Trenton-based fund, which internally manages both its domestic and international equity holdings, had a total of $11.4 billion in stocks overseas. That's a 46% increase from its $7.8 billion total a year earlier.
The pension fund's increase in international assets happened for two reasons, its move into Japan, and its bet on European technology and telecommunications stocks, said Gilles Michel, assistant director, who is also in charge of international investments for the fund.
New Jersey, which has 85% of its international portfolio in stocks, more than doubled its equity holdings in Japan last year. At the end of September, it had a 25.1% weighting in Japan in the active equity portfolio, compared with 10.8% a year earlier.
The Nikkei 225 was up 31.3% for the 12 months ended Sept. 30.
Many pension funds increased their allocations to international equities in both passive and active funds. Corporate funds, for the most part, appeared to stand pat. The top 200 corporate defined benefit funds had an average 15.4% allocation to international equity in 1999, the same as a year earlier. The top 200 public funds, however, saw the average asset in overseas stocks rise to 13.9% last year from 11.2% a year earlier.
International fixed income, meanwhile, saw its aggregate allocation weighting in the top 200 corporate defined benefit funds drop to 1.4% from 1.8% a year earlier. Leading public funds saw a 0.2 percentage point drop to 1.8% in 1999 from a year earlier.