LONDON - U.K. pension plans are reworking their equity portfolios and upping their allocations to U.S., European and Asian stocks at the expense of their domestic holdings.
Some of the larger pension plans searching for specialist global or international equity managers are:
* the L1.8 billion ($2.6 billion) City of Edinburgh Council Lothian Pension Fund, which this week will issue a request for proposals for an L80 million global equity portfolio;
* the L1.2 billion East Riding of Yorkshire Pension Fund, Goole, England, which is tendering for managers to run L200 million in international equity mandates currently managed by Schroders PLC; and
* the L1.8 billion Essex County Council Pension Fund, Chelmsford, England, which is searching for specialist Asian and U.K. equity managers for mandates totaling L165 million.
Consultants say U.K. pension plans finally are reducing their historically heavy home bias. Historically, the average U.K.-international equities split was 70%-30% of the stock portfolio, according to recent figures from Russell Mellon CAPS, Leeds. The average allocation was 63%-37% at the end of 2001, according to the firm. Within the international equity allocation, the U.S, weighting increased to 7.2% from 4.7% in 2001, and the average allocation to European equities was 9.9%.
The recent easing of statutory funding and asset-matching requirements has made many pension plans rethink the value of U.K. equities as a hedge against inflation, according to John Gillies, director of consulting for Frank Russell Co, London.
In the next few years, the average split between domestic and international equities could shift to around 50%-50%. One or two large plans might decide to go as far as converting their equity holdings to global mandates and reducing their home bias to as little as 30% of total equities, said Mr. Gillies.
Lothian pension fund's search for a global equity manager follows a decision in late 2000 to reduce the fund's U.K. equity exposure to 51% of total plan assets from 60%. International equities were increased to 29% from 22% of plan assets, said Colin Hay, principal investment officer.
The plan already uses specialist regional money managers for its U.S., European, Far Eastern and emerging market equity mandates. Plan trustees, advised by Hymans Robertson, decided to appoint a global equity manager in order to take advantage of global stock and sector selection opportunities, said Mr. Hay.
This combination of fixed-weight regional portfolios and a global equity mandate is favored by Mercer Investment Consulting, as regions become more correlated with one another, said Andy Green, head of strategic consulting at the firm.
East Riding of Yorkshire Pension Fund has maintained its 75%-25% split between U.K. and international equities despite deciding to tender for regional international equity managers, said Rodney Barton, investment manager for the plan.
"Where a company happens to be registered does not mean that's where all its earnings are sourced from," he said. He would not comment further on the plan's equity portfolio until the current tender process is completed at the end of July.
Essex County Council Pension Fund increased its allocation to international equities earlier this year, after adopting a scheme-specific benchmark, said John Wigley, spokesman for the plan and senior investment consultant at Watson Wyatt Worldwide, Reigate. The plan had used a peer group benchmark. The new benchmark will see U.K. equities account for 60% and international equities 40% of the plan's total equity allocation. This compares with the fund's previous split of 70%-30%. Mr. Wigley declined to give the amount of the equity allocation, which Pensions Funds and Their Advisers listed at 62% of total assets, or L1.1 billion.
Also, the heavyweight L24 billion British Coal Pensions Schemes reduced its U.K. equity allocation to 50% of the equity portfolio, from 60%, according to David Morgan, chief executive of the pension plans. The rest of the equity portfolio is made up of fixed weight portfolios in the U.S., Europe, Asia, Japan and emerging markets, and is managed by Goldman Sachs Asset Management, London. Plan trustees decided to increase the plans' international exposure, as they were concerned that the U.K. equity market was very concentrated and that there was increased correlation between domestic and international equities, added Mr. Morgan.
The L630 million Shropshire County Council Pension Fund, Shrewsbury, earlier this year cut its domestic equity allocation by six percentage points in order to boost its international equity holdings to 30% of plan assets.
Philip Guy, treasury manager, said the plan increased its international equity exposure to diversify investment risks. The increased allocations were split among the plan's incumbent regional equity managers: J.P. Morgan Fleming Asset Management, London, which runs 10% of plan assets in U.S. equities; Merrill Lynch Investment Managers, London, which is responsible for 10% of total assets in European excluding U.K. equities; and Schroders PLC, London, which manages 6% of plan assets in Japanese equities and 4% in Pacific region equities excluding Japan.
Plan trustees did not rule out adopting a global approach to its equity portfolio in the future, he said.
Oliver Bolitho, head of U.K. and Irish institutional business development at Goldman Sachs Asset Management, thinks the shift from U.K. equities might herald the eventual widespread use of global equity portfolios with regional allocations based on market capitalization, an approach the firm is recommending to its clients.
Such an allocation would see U.S. equities account for up to 50% of equity portfolios, with Europe including the U.K. at around 35% and Japan at 10% to 12% of total equity holdings.
Plan trustees were under increasing pressure to justify the domestic bias in their equity portfolios, given increasing correlation between U.K. and international equities and the lack of correlation between U.K. equities and U.K. wage inflation, added Mr. Bolitho.
The use of global portfolios is increasingly on the agenda at trustee meetings. "In most cases, we are pushing on an open door," he said.