NEW YORK - The United Nations Joint Staff Pension Fund has trimmed global equities to 56% of assets from 60%, while increasing fixed income and cash.
Henry L. Ouma, director, investment management services, at the $21.7 billion pension fund, said an additional $400 million has been pumped into fixed income. The bond allocation increased to 30% of assets from 28%, and cash was boosted to 10% from 2%.
The remaining 4% of assets are in real estate.
Among other changes:
* The emerging markets portfolios have been moving away from country funds and into more direct investments;
* Global small-cap portfolios are targeted to reach 10% of assets from the current 2.5% allocation.
* There is also a debate about raising the equity exposure again. Long-term guidelines call for a global equity allocation of 60% to 75%.
`A better class'
Equities were reduced as a defensive move during the market downturn, Mr. Ouma explained in an interview. "After the boom, we have been relatively cautious. We felt the markets were fragile and volatile, and that with interest rates being cut, we would do well by having cash. We would be in a position to move if the markets changed. We saw it as a better class in terms of safety and risk."
The move to cash was a departure for the U.N. pension fund, which is usually fully invested, with a cash position of less than 2%. Most of the cash has been invested in short-term U.S. Treasuries and in some commercial paper, according to Mr. Ouma. He and the investment committee used to like the high rates offered by the euro for cash, but no longer. "The mighty euro never achieved the high expectations set out for it," he said.
The U.N. pension fund, which has been a pioneer in investing in emerging markets, probably has a greater global exposure than most of its peers, Mr. Ouma said. "If you look at the U.S. as a base, we run 50% of our investments outside the U.S. We buy stocks from all around the world. We also have the most in currency exposure (compared with other pension funds). We have 40 different currencies. Whatever currency we buy, we hold a long time. Because we're already so global, we don't use overlays or derivatives."
Investing directly
Last year, the pension fund's emerging markets portfolios began investing directly in some regions, moving away from country funds. Said Mr. Ouma: "We've been doing direct investments in some of those regions, particularly in Latin America and Kenya. It's a learning process." But investments in India and China are still done through country funds. Emerging markets now comprise 5% of the equity portfolio.
The United Nations fund also has been building a small-cap portfolio. It was started in 1990 and has grown to around $500 million. The plan is to grow it to 10% of assets, Mr. Ouma said. It's managed externally by Credit Suisse Asset Management LLC, New York; Jennison Associates LLC, New York, and Dimensional Fund Advisors, Santa Monica, Calif., for North American equities; Baillie Gifford Overseas Ltd., Edinburgh; and Darier Hetsch, Geneva, for European equities; and S.G. Pacific Asset Management, Tokyo, for Asian equities.
"It's evolving," Mr. Ouma said, noting the current manager structure was adopted in January.
The investment committee reviews asset allocation guidelines every quarter; the short-term cash allocation is now between 2% and 8%, while the long-term one is 3% to 10%. The committee decided to keep the long-term allocation as a tactical move over the next 12 to 18 months. "They said you're not losing by holding cash."
Concern on contributions
There is also a concern that contributions are being wiped out by benefit payments. "While we have enough to cover them, and expect to for quite a while, the question is whether the fund is maturing. And if it is, we need to focus more on income and less on growth.
"Even though we're more conservative now, the investment committee felt that we had not reached a level where we should be ignoring companies like Microsoft and just buying utilities. We're still on a middle course, oriented toward growth and value, and avoiding extremes. Basically, we're still comfortable buying global stocks."
When the U.N.pension fund buys, its chief focus is whether it's buying the best security in the world, not whether it is a U.S. or U.K. stock, emphasized Mr. Ouma. "Right now, for example, we don't own any U.S. auto stocks at all, because we can get Toyota, BMW or Honda. But in some sectors, such as utilities, we're not global."
Except for small-cap equity, the rest of the U.N. portfolio is managed internally by a staff of 32, which includes back-office personnel.
It uses a number of non-discretionary advisers for guidance on its numerous strategies. Fiduciary Trust Company International, New York, advises on fixed income and the $7.7 billion in U.S. equities; Nikko Global Asset Management, New York, advises on the $1.3 billion Asian equities portfolio; and BNP Paribus Asset Management Inc., New York, advises on the $3 billion in European equities.
