Executives with IBM Corp.'s $45 billion defined benefit pension fund have scaled back the fund's real estate and private equity investing because the fund has exceeded its 10% target for both.
Commitments still are being made, but they are smaller than before, said R.L. "Jay" Vivian, assistant treasurer and managing director of the IBM Retirement Funds, Stamford, Conn.
Continued commitments help fund officials maintain relationships with the partners. "We have some really good managers who make money for us," he said.
Private equity and real estate have been combined as an asset class for about two years. At that time, IBM officials also stopped doing direct deals and moved to partnerships, which give it a wider range of industry sectors and geographic exposure. The fund's sole remaining property, One Federal Street, Boston, was put up for sale this winter.
Fund officials also looked at indexing real estate, but decided against it because the two main real estate indexes, the NCREIF index and the NAREIT index, are not weighted properly to reflect the property types that many investors own, Mr. Vivian said.
Massive remodeling
On the defined contribution side, however, executives at IBM's $20 billion 401(k) plan are contemplating using real estate investment trusts as a way for participants to invest in real estate. They're also considering a high-yield bond option, and are expecting to hire a firm to provide investment advice to participants.
These changes are a continuation of the massive remodeling the 401(k) plan has undergone since last summer. On July 1, executives nearly doubled the investment options in the plan, following a poll of IBM employees.
Ten new, primarily indexed mutual funds were added to IBM's existing lineup of 11 investment options, explained Thomas L. Eng, 401(k) program manager.
IBM's funds are divided into three tiers: lifestyle; core; and extended choice. The core tier includes Treasury inflation-protected securities managed by State Street Global Advisors, Boston. IBM executives found that TIPs are the low-risk investment that best track liabilities, said Jim H. Rich, chief investment strategist for the IBM retirement fund.
While the plan only includes 18% company stock, Mr. Rich said he is concerned about some of the investors who have put much of their account assets in IBM stock.
"Ten percent of employees have virtually all of their money in company stock," Mr. Rich said. "I worry about them. I hope they become wildly rich, but I worry about them."
The beauty of adding mostly index funds is that it has helped keep down costs, Mr. Rich said. With the overhaul, IBM's total average weighted cost is eight basis points, he said.
The plan does not include a self-directed brokerage account.
"I'm skeptical of brokerage windows making sense for 401(k) plans," said Mr. Rich. "We feel people are overwhelmed by all the choices they have today. Participants need advice. They do not just need education. I'm all for it."
Bullish on fixed income
On the defined benefit side, Mr. Vivian is bullish on fixed-income investments, and finds their returns superior to those available from public equities.
Mr. Vivian noted the IBM pension fund has been using the Lehman Universal bond index as its benchmark, which is far broader than the Lehman Aggregate and the Lehman Corporate bond indexes used by most large pension funds. The Universal index includes more "exotic asset classes such as emerging market debt and high yield, which are unusual to find in a bond benchmark," he said.
IBM has been investing in both of those asset classes because there is money to be made there, and overall the program has been quite successful, Mr. Vivian said. He declined to give specific returns. The fund has 33% of assets allocated to fixed income, and 67% to equities.
He said company officials don't try to time the market, or overweight certain asset classes, because it's too difficult to pick the right stocks, the right currencies, the right real estate, Mr. Vivian said.
Instead, they rely a lot on indexing. Currently, 50% of the total U.S. defined benefit plan is indexed, as is 50% of the $25 billion held in IBM's 50 non-U.S. pension plans.
