LONDON - Plan trustees in Europe are questioning their exposure to emerging markets as long-term returns remain firmly in negative territory.
While there is no widespread evidence that plan sponsors are walking away from emerging markets as an asset class, trustees increasingly are concerned, said Koen de Ryck, consultant and founder of Pragma Consulting, Brussels.
The commonly used Morgan Stanley Capital International Emerging Markets Free index returned an annualized -6.5% (in U.S. dollars) for the five years ended March 6.
Officials at the Rijswijk, Netherlands-based industrywide plan for Dutch metal workers are among those feeling the heat. Roland van den Brink, head of investment policy at Stichting Bedrijfspensioenfonds voor de Metaal en Technische Bedrijfstakken, said trustees had been asking him why the plan has 6.5% of its e18 billion ($16.8 billion) in assets invested in emerging markets. He would not identify the fund's managers.
Trustees so far have accepted the argument for diversification, and plan officials do not intend to lower the allocation to emerging markets, said Mr. van den Brink.
"Diversification means in principle that some markets will do well and some won't. Going forward, the emerging markets may do better than the U.S. and European markets," he added.
"On balance, trustees are keen to pull out. ... We preach that one should look at it over the longer term," said Mr. De Ryck.
It is not clear whether trustee sentiment would lead to a shift out of emerging markets. But if returns continue to be weak, there is a strong chance they could decide to cut their losses.
"Reacting to poor performance by withdrawing from emerging markets is the opposite of diversification; it's chasing past returns," said John Gillies, senior consultant with Frank Russell Co., London.
Karel Stroobants, deputy general manager at the Belgian Voorsorgskas voor Genesheren, Tandartsen en Apothekers, Brussels, relishes his scheme's exposure to emerging markets.
Poor returns on the MSCI EMF over five years was proof that emerging markets were not correlated to the U.S. or developed Europe, he said. "This helps reduce the overall risk of my portfolios," Mr. Stroobants added. He is confident that emerging markets will perform better over the next year but said the scheme viewed its emerging markets exposure as a long-term or 15-year bet.
Emerging markets investments account for 15% of the e550 million fund and are managed by INVESCO Asia Ltd., Hong Kong, and Sanford C. Bernstein & Co. Inc., New York.
Mr. Stroobants said he has not had any pressure from the fund's trustees.
The 3 billion ($4.4 billion) J. Sainsbury PLC Pension Plan, London, has 1.5% of assets invested in emerging markets and plans to increase this to 2.5% during the next year by giving more funds to its money manager, Capital International Ltd., London, said Geof Pearson, secretary to the fund.
He said trustees needed to "grin and bear it" as a pension plan needs to invest in as broad a range of assets as possible.
"Past performance is no guide. If anything, now is the time to be putting more money in," he said.
Not that the Sainsbury trustees and executives have not lost patience with a poorly performing asset class. The plan's ill-starred foray into venture capital was ended in 1994 after 10 years of unsatisfactory returns.
"You have to view an asset class like this over at least one seven-year economic cycle. An asset class like this would have a 10-year life span," said Mr. Pearson, who added Sainsbury first invested in the asset class in 1995.
Mr. Pearson said he has not had any real pressure from trustees, but has had a few questions about emerging markets' performance.
The 15.2 billion Swedish kroner ($1.5 billion) Telia Pensionskassa first invested in emerging markets in late 1998 using Capital International, said Peter Antonsson, the plan's president.
At this stage, 3% of plan assets are invested in emerging markets and Mr. Antonsson has been pleased with the performance. Nonetheless, the scheme is not planning on increasing its allocation.
Philip Neyt, general manager of the 139.5 billion Belgian franc (US$3.2 billion) pension plan for the staff of telecommunications group Belgacom SA, Brussels, views emerging markets as an alternative asset in the same league as hedge funds. He said he would not invest in these markets unless he could see a 10-year track record for both the asset class and the manager.
Last year, the plan made its first ever allocation to emerging markets by giving Capital International a mandate to run 1% of plan assets. This decision was part of a bid to diversify.
Most U.K.-based pension plans invested little in emerging markets so trustees are not too worried about their relative performance against U.S. or U.K. equities, said Brian St. John-Hall an associate at Bacon & Woodrow, London. "Given the volatility, one would probably not want much more than 5% of the total equity allocation in this asset class."