GREENWICH, Conn. -- Some 17% of corporations with pension assets of between $1 billion and $5 billion have cash balance plans, up from 6% a year ago, Greenwich Associates reports.
Greenwich's survey of 1,500 pension funds also found 9% of companies with pension assets of more than $5 billion have cash balance plans, up from 6% in 1998. And among companies with assets of $100 million to $250 million, the use of cash balance plans doubled to 4%.
"The number using cash balance plans is still very small, but growing rapidly," said Rodger Smith, a partner at the Greenwich, Conn.-based consulting firm that conducted the 28th annual survey.
At the same time, passively managed U.S. equity jumped to 19.8% of pension fund assets in 1999, up 1.5 percentage points from 1998.
All of the growth in domestic stocks came from indexed assets, Mr. Smith said.
The survey also found:
* 38% of all funds terminated one or more managers last year;
* 83% of funds implemented strategies to increase diversification; and
* 24% of corporate funds had a "strategic relationship" or "macro" manager that helps the fund with asset allocation and investment policy issues. That's triple the number from 1996.
A similar increase occurred among public funds, with 15% reporting a strategic relationship in 1999, vs. 5% in 1996.
"These kinds of managers can provide a forward-looking perspective to help funds decide when to shift in and out of certain asset classes, which is particularly helpful in tumultuous markets," said Mr. Smith, who predicts that more funds will adopt these relationships.
The survey revealed that as of Dec. 31, half the assets of public funds were in passively managed U.S. portfolios, most often benchmarked to the Standard & Poor's 500 stock index.
"At one time, investing in the S&P 500 meant investing in a balanced fund because it was 50% value stocks, 50% growth stocks; but by the end of 1999, that had changed to 80% growth stocks," said Mr. Smith.
As a result, these pension funds' passive investments are heavily weighted toward growth stocks. "Funds should be asking themselves if that's where they want to be or should be," he noted.
A very small number of technology and Internet stocks represent a large proportion of those growth stocks, according to Greenwich's research, so investors buying into that index are making a big bet on technology and telecommunications. But if they underweight these sectors, they're making a big bet against them.
The report also reveals that public pension funds have $120 billion more in passive domestic stocks than in active, and that the amount of money officials are directing into passive assets now exceeds the amount flowing into active.
The average fund has 37% of its domestic stocks indexed, but public funds had the lion's share of their domestic equities indexed, at 54.3%; while corporate funds indexed less than half of that, at 23%; and endowments indexed 20%.
International equities
At the same time, more money has been flowing into active international equities. The average active international equity allocation of the plans surveyed increased to 8.4% in 1999 from 7.9% in 1998. This growth is at the expense of domestic bonds, which fell to 23.3% in 1999 from 24.2% in 1998, and equity real estate, which slid to 2.3% of assets in 1999, down from 2.5% in 1998.
Another trend pegged by the report is the increased pace of manager terminations.
That is largely because pension executives have been hiring more managers to implement their diversification strategies, particularly for small-cap and emerging markets equities. Some 71% of pension funds now invest in small-cap stocks, up from 63% in 1995. Also, 75% of funds now invest in active international equities, up from 61% in 1995. Of that 75%, 58% use active strategies benchmarked against the Morgan Stanley Capital International Europe Australasia Far East index, up from 52% in 1995. At the same time, executives have switched from international to global bonds. Some 16% of those surveyed used global bonds in 1999, up from 10% in 1995; while 27% used international bonds in 1999, down from 31% in 1995.
The changing asset allocations spurred 38% of all funds to terminate at least one manager last year. Of funds that made changes, 45% of endowments terminated managers, compared with 40% of public pension funds and 35% of corporate funds. At least 17% of all funds, up from 13% in 1998, fired a value manager. And one-third of all funds simply switched managers during the year. Among corporations with pension assets of more than $5 billion, 60% switched managers, while 40% of endowments and 35% of public funds switched.
Those figures are too high, Mr. Smith said. "Funds should be looking at managers more for the long term than the short term.
"It's very expensive to terminate managers, because a new manager usually sells all the stocks in a portfolio. That can easily cost the pension fund 3% to 4% of the portfolio in transaction costs alone."
Termination advice
His advice is for investment committees to ask themselves: " `If this manager is chosen and his performance over the next three to five years is disappointing, are we prepared to commit now to double up his allocation?' Pension funds may not be thinking enough about the new managers they hired."
The Greenwich consultants also suggest that before firing a manager, a pension fund official should determine whether the disappointment is the result of the manager's failings or if the sponsor has done enough to make the relationship work. They also advise executives not to change managers or strategies just for the sake of change.
The survey also found that defined contribution plans were not very well-diversified in 1999. They had an average of 69.3% in domestic stocks, up from 61.4% in 1996.
And while allocations to company stock had dropped to 30% from 33.3% in 1996, company stock was still the dominant investment in those plans.
