Greenwich, Conn. - Private equity continued to storm its way into asset mixes in 2000, according to Greenwich Associates' annual "United States Investment Management - Market Dynamics Report."
Each year, Greenwich asks all American pension funds and endowments and foundations with at least $100 million to participate. Of the 2,472 funds contacted, 1,374 were interviewed for the survey, which was conducted in September and October. Greenwich creates estimates for funds whose officials refuse to be interviewed.
In 1996, private equity investments represented 1.8% of $3.3 trillion. In 2000, Greenwich estimated the funds' asset totals had grown to $6.3 trillion and the percentage invested in private equity stood at 2.9%. During that time, the dollar amount in private equity nearly tripled, to $179 billion from $61 billion. Endowments and foundations responding to Greenwich's survey increased their exposure to private equity four percentage points to 9.9% ($51.6 billion) on average in 2000.
And, 47% of the survey's defined benefit respondents expected the private equity portions of their asset mixes to increase by the end of 2001.
More rapid growth
"Private equity is going to continue to be a rapid growth area in percentage terms," said Rodger Smith, Greenwich partner, one of the study's authors.
In addition, the pension fund executives interviewed expect to hire fewer money managers and invest more money passively this year, according to the report, which was to be released this week.
Forty-nine percent of corporate funds expect to hire new managers in the next year, down 11 percentage points from the 1999 study.
Overall, 39% of all fund executives said they expect to hire a new manager this year, down only one point from 1999.
In addition, in a year in which domestic equity holdings declined slightly, 22% of the study's defined benefit plan respondents reported they expected passively managed equities would comprise a greater portion of their asset mixes by the end of 2001. Twenty-four percent of defined contribution plans expected to have a greater allocation to passive U.S. equities by the end of the year.
In 2000, funds had an average of 19.8% of total assets passively managed, the same as in 1999.
"The use of passive equities in the U.S. is trickling down to midsized funds," Mr. Smith said.
Overall, domestic equities comprised 51.8% of the average fund's assets in 2000, down from 53% in 1999. This represents the first time Greenwich has found a drop in exposure to domestic equities since 1996.
The asset class "is down primarily because many pension funds have exceeded their allocations," Mr. Smith said.
Executives at 14% of all defined benefit plans and 18% of all defined contribution plans said actively managed domestic equities would increase this year, while 21% of defined benefit respondents and 9% of defined contribution respondents said actively managed domestic equities would be lower by the end of this year. In addition, the average fund's exposure to domestic large-cap value stocks dipped significantly in 2000, to 25.8% of domestic equity allocations from 32.3% a year earlier.
"It reflects the underperformance of value during the period," Mr. Smith said.
Company stock down
The average amount of company stock held in corporate defined contribution plans dropped 5.7 percentage points from four years earlier, to 26.8%. The drop is noteworthy, Mr. Smith said, even though the percentage is still a hefty chunk of assets.
In 2000, the average corporate defined benefit plan's assets in its own company's securities was 5.4%, down 0.9 percentage points from 1996. In addition, 19% of survey respondents with defined benefit plans that invest in their own company's securities expected that portion of their fund to be smaller by the end of 2001. Only 7% expected the percentage to be greater.
While domestic equity exposure dropped in 2000, exposure to international equities increased. Active international equities made up 9.6% of the average asset mix in 2000, a 1.2 percentage point rise from 1999. Passively managed international equities experienced a slight 0.2 percentage point rise to 2.4% of the asset mix.
Overall, international stocks and bonds made up 13.2% of the average fund in the Greenwich universe. That number might have been higher, but international bonds dropped 0.3 percentage points to 1.2%.
Thirty-three percent of defined contribution plans surveyed reported expectations of increases in passively managed international equities by the end of 2001. None of the responding plans expected a decrease in the asset style. Twenty-three percent of defined benefit plans expected an increase in passively managed international equities.
In 2000, corporate defined contribution plans' allocations to international equities rose 1.2 percentage points, to 4.2% of total assets, Greenwich said. Public defined contribution plans' allocations to international equities rose 1.3 points to 6.1% of total assets.
Endowments and foundations have experienced a phenomenal growth rate since 1996, growing 136% to a total of $522 billion in assets, according to the report. But the 18.2% growth rate in 2000 didn't match up to the 23.2% reported return in Commonfund's Benchmark Study (P&I, March 19). The disparity is more intriguing because Commonfund's study surveyed funds with less than $100 million, which Greenwich did not.
Other results from Greenwich's report are:
* Equity real estate had a slow year, with growth of just $23.4 billion among all funds in the Greenwich universe.
* Corporate plan sponsors expect to have 65% of their retirement assets in defined contribution plans by 2010.
* Cash balance plans have not yet experienced a big growth in popularity. Of the 390 corporate funds asked, only 5% expected to add them, while 11% have such plans.
* Endowments reported paying a mean fee of 50.4 basis points to investment managers, down from 51.5 in 1999. Public funds reported paying 14 basis points less.
* Only 48% of the 486 corporate funds asked conducted risk assessment studies in the past year.