STAMFORD, Conn. - U.S. pension funds are hiring more core-plus domestic fixed-income managers and using fewer specialist international, global and high-yield fixed-income money managers.
A new study by InterSec Research Corp., Stamford, on international investing by U.S. pension funds shows that in the first half of 2001, new international and global fixed-income mandates by U.S. pension funds totaled less than $2 billion, whereas they had totaled $11 billion for all of 2000.
"They're moving money from global fixed income into core-plus strategies benchmarked to the Lehman Aggregate Bond index, and allowing opportunistic exposure into other (fixed-income) securities such as international and high-yield," said Carol Parker, vice president for research and consulting manager at InterSec.
"The (U.S.) market has made up its mind," said Lee Thomas, chief global strategist at PIMCO, Pacific Investment Management Co., Newport Beach, Calif., which manages $200 billion in fixed-income assets for U.S. pension funds. "Rather than giving out separate mandates for international (fixed income), U.S. pension fund sponsors are letting U.S. money managers invest in foreign bonds."
Although pension funds have been giving their domestic fixed-income managers the discretion to invest in international and high-yield bonds for a while, the trend has grown stronger of late, as indicated by the InterSec report.
Mr. Thomas said 71% of PIMCO's U.S. pension fund clients are using the core-plus strategy and allowing PIMCO to invest a portion of their U.S. fixed-income portfolios in international fixed-income securities on an "opportunistic" basis.
"Pension funds that used to give out a separate 10% mandate of their fund for foreign bonds are now giving U.S. money managers the discretion to invest up to 20% in foreign bonds," said Mr. Thomas. "They may end up with more money invested in foreign bonds this way than in the old way."
At the manager's discretion
Illinois State Universities Retirement System, Champaign, is one PIMCO client that uses the core-plus strategy for its $2.55 billion in fixed-income investments.
"The bottom line is our board is not comfortable making the decisions on when to invest in international or high-yield fixed-income securities," said John R. Krimmel, chief investment officer of the $10.8 billion pension fund.
"We tell the manager 'we want you to make the decision' about when to invest in international. It's a comfort level and an expertise level," he said.
Illinois' fixed-income managers are benchmarked to the Lehman Aggregate index. Performance is measured both on an absolute basis and a risk-adjusted basis. "On a risk-adjusted basis they have to outperform the Lehman Aggregate," he said.
The pension fund's liabilities are denominated in dollars, Mr. Krimmel said. "We feel that the fixed-income portion is the bedrock of our portfolio and feel it should be denominated in dollars. However, we feel if there is a good opportunity to add value to the fund from international or high-yield fixed-income securities, our managers should take advantage of it."
The Illinois fund "wouldn't hire a manager that we didn't feel had the capability of investing in international and high-yield, as well as domestic fixed-income investments," he said.
The Illinois fund's core-plus fixed income managers include PIMCO, which manages $1.8 billion for the fund; BlackRock Inc., New York, $400 million; Chicago Capital Management, $200 million; and Metropolitan West Capital Management LLC, Newport Beach, Calif., and Western Asset Management Co., Pasadena, Calif., both of which manage $75 million.
Met West and Western are recent hires. The funding came from PIMCO's portfolio because, Mr. Krimmel said, "we wanted to diversify the portfolio a bit more."
"We're seeing movement toward the core-plus strategy where plan sponsors use a domestic benchmark and allow their managers to invest in a broader opportunity set," said Rob Zink, director of portfolio strategy for Bridgewater Associates Inc., Westport, Conn.
"From a benchmark perspective, U.S. pension plans realize their liabilities are in U.S. dollars but they realized there could be opportunities in international investments in other currencies," added Mr. Zink. "They have a strategic exposure to the U.S. through their benchmark selection but are willing to take some amounts of limited risk to achieve active benefits of (investing in) global markets."
Oregon Public Employees' Retirement Fund, Salem, also has adopted a core-plus fixed-income strategy. The fund's $6 billion in fixed-income investments had been managed internally by Bill S. Unverzagt, investment officer for fixed income, but as he will be retiring next year, the fund decided to hire outside managers who use the core-plus strategy.
"I think the best way to do fixed-income investing is (with a core) and then do it opportunistically investing in international or global fixed income and junk bonds, depending on which is the most attractive asset at the moment," said Mr. Unverzagt.
The $42 billion pension fund has hired five managers, dividing up $3 billion in fixed-income assets in core plus strategies. They are: Wellington Management Co. LLP, Boston; Western Asset Management Co.; Fidelity Management Trust Co., Boston; Alliance Capital Management LP, New York; and BlackRock.