More pension funds are specifying style when searching for international managers.
"There has been a dramatic shift in plan sponsors' perception of the importance of style in their manager hiring practices in the last several years," according to a study by InterSec Research Corp., Stamford, Conn., on the role of style in international investment.
The report noted public funds, in particular, consider style diversification - the distinction between growth and value - to be highly important; in 1998 there were 18 hirings of international equity managers, and style was rated as highly important in only five of them. But in 2001, the report said, style was rated as highly important in all but one of 19 international hirings.
* State Universities Retirement System of Illinois, Champaign, invested $400 million in an international value index fund;
* Indiana Public Employees' Retirement System, Indianapolis, searched for and hired a global value equity manager for a $250 million mandate;
* Oklahoma Public Employees Retirement System, Oklahoma City, invested $170 million in an active international value equity strategy;
* San Jose (Calif.) Retirement System invested $50 million in an international growth equity mandate; and
* Pennsylvania Municipal Retirement System, Harrisburg, invested $53 million in an international all-cap growth equity strategy.
More style searches
Carol Parker, vice president of InterSec, who ran the study, said, "a lot more (international) searches that are announced have style associated with them now."
One reason: more standardized corporate reporting in the developed countries, which makes it is easier to do the analysis on international companies and make the distinction between growth and value.
Said John Krimmel, chief investment officer of the $9.8 billion Illinois universities fund: "We realize style is important. The divergence between growth and value has been huge, and it's becoming more of a factor."
Of the $1.8 billion the fund has invested in international equities, $45 million is with a deep value manager, ValueQuest/TA LLC, Marblehead, Mass., and $65 million is with an aggressive growth manager, Dresdner RCM Global Investors, San Francisco. Barclays Global Investors, San Francisco, runs the international value index fund, which is benchmarked to the MSCI EAFE value index.
Mr. Krimmel said the rest is with firms that are supposed to be core international equity managers, but many of them have developed a growth or value bias over the years. "It's a natural progression in the development of the markets," he said. Money managers that say they are core managers "have a tendency or bias one way or the other. What used to be core is now growth or value," he said.
Patricia Gerrick, CIO of the $10 billion Indiana fund, said the fund wants both a value and a growth manager to run $250 million each for its new global investing strategy. And since "we only had time for one search" last year, the fund decided to start out seeking a value manager, she said. It chose Brandes Investment Partners LP, San Diego, and plans to search for a global growth manager later this year. Ms. Gerrick said the fund is slowly allocating money to Brandes and has given the firm $60 million so far.
She said fund officials believe the global markets are behaving more like domestic markets in terms of how investment styles go in and out of favor.
The $4.8 billion Oklahoma Public Employees fund and the $957 million Pennsylvania Municipal fund have adopted the same approach. Each put a third of its international equity assets in an EAFE index fund, a third in growth and a third in value stocks.
Oklahoma hired value manager Delaware Investment Advisors, Philadelphia last year because "we wanted a manager to complement Capital Guardian (Trust Co.), which is a growth-style manager," said CIO Kirk Stebbens.
Mr. Stebbens said part of the reason for the fund's decision to split the international equity portfolio into thirds was the reconstruction over the last year of the EAFE index. (Final changes are scheduled to take place May 31).
"The reconstruction of the benchmark indexes could make (them) more difficult to beat," he said.
Plus, he said, "if you buy the argument that active management can work in international, you have to make sure you're diversified so if one's out of favor, the other is in favor." The Oklahoma fund has a total of $515 million in international equities, including $170 million in an MSCI All Country World index (ex-U.S.) fund run by BGI.
The Pennsylvania Municipal fund hired Waddell & Reed Asset Management Group, Overland Park, Kan., as its growth manager and Mercator Asset Management LP, Fort Lauderdale, Fla., as its value manager, to run $53 million each. It also has about $50 million with State Street Global Advisors, Boston, in its EAFE index fund.
James Allen, secretary of the Pennsylvania Municipal fund, said the fund uses the SSB Broad Market index, a slightly broader version of the SSB Primary Market index, as its benchmark for the active international mandates.
San Jose Retirement Systems hired William Blair & Co. LLC, Chicago, as its international growth manager specifically because it wanted a growth manager to balance out its international value equity investments, according to Donna Busse, investment analyst with the $1.67 billion fund. The fund has $41 million invested with Brandes in a value strategy and $64 million with the Bank of Ireland Asset Management (U.S.) Ltd., Greenwich, Conn., which has a "value tilt," she said.
"The trend in the international market is that it is getting to be more defined in terms of growth and value, like the domestic market," Ms. Busse said.
But one problem plan sponsors are facing, which they don't have in the domestic markets, is in evaluating international managers' style performance - benchmarks that provide an accurate measurement.
"That's the real frustration part of the exercise," said Illinois universities' Mr. Krimmel. "We think we're doing a better job of evaluating managers, but sense there's not a good way to measure it. We're doing the best we can."
Morgan Stanley Capital International Inc., New York, which runs the Europe Australasia Far East index, the dominant index for core international equity investing, has not done a good job of adding the indicators to measure growth and value, according to the InterSec report and Mr. Krimmel.
"I hope MSCI will take a look at their indices and do a better job of making the cut - it's not just book-to-price ratio" that measures value and growth, he added.
MSCI now takes the book-to-price ratio of all the stocks in the EAFE index and puts the cheaper ones into the growth index, while those with higher ratios go into the value index.
InterSec's Ms. Parker said the Salomon Smith Barney Primary Market Euro-Pacific index uses "multiple criteria" to measure growth and value. To measure value, the index uses price-to-book ratio, price-to-sales, price-to-cash flow and dividend yield. To measure growth, it uses five-year historical earnings per share growth, five-year historical sales per share growth and the five-year average annual internal growth rate.
Jacques Roulet, vice president and member of the index committee at MSCI, said the firm has made no decision on changing the indexes.