U.S. pension fund executives are closely watching the battle between growth and value managers as growth stocks in overseas markets continue to outperform.
Some funds are waiting to make moves, while executives at other funds have seen enough.
The international team at General Motors Investment Management Corp., New York, with a $16 billion portfolio of developed market stocks, is studying whether it should rebalance or "stay the course" with its international growth and value managers, said David Holstein, managing director of international investments.
In a shift to growth, the State Universities Retirement System of Illinois, Champaign, last week terminated international value manager Brinson Partners Inc., Chicago, which ran a $325 million portfolio for the fund.
In turn, it hired two international growth managers, Oechsle International Advisors and Dresdner RCM Global Investors, to run $50 million each, and value manager ValueQuest/TA LLC to run $25 million. The rest of the assets went to a passive fixed-income portfolio run by Barclays Global Investors.
Funds have reason for concern. For the past two years, international growth managers have kicked the stuffing out of international value managers. The median EAFE growth manager was up 34.8% for the 2-year period over 1998 and 1999, while the median EAFE value manager returned 19.8% during the same period, according to research by InterSec Research Corp., Stamford, Conn. The Morgan Stanley Capital International Europe Australasia Far East index returned 23.4% in the same period.
The median blend manager, which invests in both styles, returned 28.1% for the two years, according to InterSec.
InterSec's universe has 17 growth managers, 35 value and 54 blend.
Pension fund executives are grilling their managers who run value-style portfolios.
"We've gone back to our value managers and challenged them," said GMIMCo's Mr. Holstein. "Do their processes work? Can they handle the new economy?"
GMIMCo, which manages the $76.8 billion defined benefit assets and $26.8 billion defined contribution money for General Motors Corp., has 17 international, developed markets managers.
The strong performance of growth managers forces pension fund executives to consider rebalancing. "If you leave (the portfolio) alone, the fund will have more and more of a growth bias. Do you keep that or rebalance?" Mr. Holstein asked.
Another option would be to give more cash to its style-neutral managers. In the end, however, "it's not a foregone conclusion we will rebalance," he added.
GMIMCo's staff should make its decision to rebalance or not sometime in the next few months, he said.
In the past decade, many of the leading international managers have been value-oriented firms. While domestic equity mandates have been broken down to close to half a dozen types, from large-cap growth to small-cap value, international mandates routinely have come in a one-size-fits-all package.
Now it's not so simple. The growth vs. value question is being asked by the investment staff at the $166 billion California Public Employees' Retirement System, Sacramento, which is in the middle of overhauling its active international manager program.
Unlike past searches for the system, this one is paying more attention to the style question. One reason is that better data are available when it comes to international stocks and markets. "We're cognizant of it," said Mary Cottrill, senior principal and investment officer. "The measurement is better today. It's important to get a diversified manager lineup."
The fund has no set number of growth or value managers it's looking at, she said. It is, however, considering some distinction between the two sides. She added that, as part of the process, the investment committee could recommend the board interview all international growth managers in one session and international value managers in another.
Staff at CalPERS, which has a 20% target allocation to international equities, clearly want to put more money in the hands of active managers, Ms. Cottrill said.
The fund's current passive/active split is 75%/25%, but after it wraps up the search and funds managers, the amount actively invested could be as high as 40% of the international allocation.
Traditional value managers of international equities have been pummelled over the past couple of years, according to Pensions & Investments' Performance Evaluation Report.
Although the numbers for value managers are positive, they fall far short of growth managers' returns. Morgan Stanley Dean Witter's core international portfolio, for example, was up an annualized 18.8% for the two years ended Dec. 31. Other value managers saw positive returns of a similar range. Brinson was up 19.3%, Grantham Mayo Van Otterloo & Co. LLC returned 14.9%, and Lazard Asset Management gained 21.4%.
In comparison, growth manager Oechsle international's portfolio was up 31% and Dresdner RCM's core portfolio was up 36.8% for the same period.
MSCI's EAFE growth index was up 25.8% from the two-year period, while the EAFE Value index was up 20.9%.
This year, while some overseas markets, particularly in Asia, struggle, growth is still beating value. Through March 13, the EAFE Growth index was down 0.5% while the EAFE Value index was down 6.1%. EAFE was down 3.2% for the period.
Consultants are taking notice and asking money managers to chart performance against international style indexes.
Evaluation Associates is one. Two years ago, the Norwalk, Conn.-based firm created style universes for international managers, said Bryan Decker, director of international manager research. The move to measure international managers this way makes sense, particularly as more money management firms shift to sector research and away from country research, he said. There clearly are global growth sectors such as tech, media and telecom, and global value sectors such as basic industries and utilities, he said.
Not all investors, however, are sure that the growth/value split is the key to investing overseas. Many still stress that picking the right country and sector are more important than any specific style.
In the MSCI indexes, for example, the important driver of returns over time was country and sector, not whether a stock could be classified as value and growth, said Sue Mullin, a director with Murray Johnstone Group in Chicago.
Murray Johnstone, a growth at a reasonable price manager, returned 25.9% in the two years. It manages about $750 million in international equities for U.S. and Canadian pension funds and endowments.
Measures such as MSCI's indexes raise investor awareness, but also shape perception, she said.
"Personally, I'm not convinced that value vs. growth is the key to international yet. It may become so, but it may be a self-fulfilling prophecy," she said.
