GREENWICH, Conn. - U.K. and European institutional investors have been increasing their investments in U.S. equities during the past two years, even as the U.S. equities markets have declined precipitously from their highs of the late 1990s, according to a new report by Greenwich Associates, Greenwich, Conn.
The report says that between April 30, 1999, and April 30, 2001, the average U.S. equity portfolio held by U.K. institutions more than doubled, from just more than L730 million ($504 million) to L1.7 billion. U.S. equities now account for 27% of U.K. institutions' total international equity portfolios, up from 18% in 1999.
There is a similar story in continental Europe, where the average U.S. equity portfolio size among institutions doubled from $715 million in 1999 to $1.4 billion in 2001 and increased to 25% of their international equity portfolios from 20%.
Jay Bennett, a Greenwich consultant, said much of the increased U.S. investment by European institutions was in reaction to perceived missed opportunities for big gains in the recent past. "They have been playing catch-up, but whether that continues has yet to be seen," he said.
He pointed out it can take institutions "months or years to change investments, as they have to go before their investment committees. For the three years prior to 2000, the Nasdaq market had been up three- to five-fold. Money managers felt they were losing if they were not invested in U.S. equities."
"In hindsight, it came at just the wrong time - they're chasing last year's profits," he said. "A lot of these managers wish they had the foresight to be in (the U.S. equity market) when the pickings were good, instead of now when things went bad."
"For a long time, U.K. pension funds measured their performance against each other, rather than against the performance of the markets," said Charles Farquharson, head of institutional marketing in the United Kingdom for Merrill Lynch Investment Managers, London. "Positive and negative views on markets got accentuated and a few years ago managers were against investing in the U.S., so investors had low exposure to the U.S. while the U.S. markets outperformed."
He added that Europe had had a "non-equity culture." But now, "with European investors looking for diversification, the U.S. has been a better place to diversify."
Now that U.K. pension funds measure their performance against the market, "the response is they want proper diversification. That has resulted in (pension) schemes adding to U.S. equity investments," said Mr. Farquharson. Even though the U.S. markets are now going through tough times, U.K. pension funds "are taking a long-term investment perspective and increasing their investments in the U.S."
Mr. Bennett pointed out that "armchair quarterbacks ran into a couple of events. There was the rise of U.S. markets beyond anyone's expectations, which made them (U.K. and European institutions) feel they had to be in it."
"They were investing when the markets were going down," he said. "Whether they will turn off the floodgates, I don't know, since they missed some opportunities in the U.S. markets. But this could be a good time for them to get into the U.S. (equity) markets if the markets recover."
He also pointed out that many U.K. and European pension funds were underfunded and went into the U.S. equity markets hoping to get the big returns of the late 1990s.
"Just as there was a confluence of positive events to get U.S. equities going up, there was a confluence of negative events to get stocks going down," said Mr. Bennett. "These are long-term investors. They will stay with stocks."
Many U.S. stocks are really global stocks because the companies have businesses all over the world, he said. "These are global corporations with a hand in every market. Portfolio diversification would argue that you have to be more exposed to these stocks and to the U.S. market."
The director of a pension fund from a large U.K. corporation, who did not want to be named, said that after an asset-liability study in 1997, his fund moved to regional stock weights and invested in the U.S. equity markets, getting a good portion of the upward move. The fund is still invested in the United States and is taking a long-term view.
Mr. Bennett said the move in the United Kingdom and Europe to specialized mandates from balanced mandates also helped boost investment in U.S. equities.