Transition managers say U.S. pension executives are piling alternative investments and international equities, particularly emerging markets, in an attempt to boost performance.
At the same time, they're also considering launching asset-liability matching strategies, these transition managers said.
"There's clearly a decrease in U.S. equity in general and U.S. large-cap assets in particular," said Ross McLellan, a managing director at State Street Corp.'s investment research and trading unit in Boston, describing recent transition activity. "Basically there are three places where the money is heading: You have alternatives — private equity, hedge funds, real estate — global and emerging markets, and benefits."
Most transition managers declined to provide data backing up their claims that pension plans are moving assets out of U.S. equities into other areas.
For example, Brian Roberts, head of transition management in North America for Russell Investment Group, Tacoma, Wash., said the transition business at Russell was up more than 200% in the first quarter of the year from the fourth quarter of 2005. He said much of that growth was from clients worldwide increasing allocations to international equities, derivatives strategies and fixed income. But he wouldn't provide dollar amounts.
"In international securities, we've seen an uptick in our activity from our Canadian client base due to the elimination of the foreign property rule," he said, referring to the law lifted last year that restricted how much Canadian pension plans could invest outside the country.
He said within the international asset class, emerging markets have been a particularly popular target asset class among Canadian and other pension funds.
"There has been some increased allocation to emerging markets," Mr. Roberts said. "It was, until the very recent past, trending up."
In fact, the Morgan Stanley Capital International Emerging Markets index was up nearly 25% this year when it peaked at 881.52 on May 8. Since then, it's dropped about 15%.
Mark Keleher, president of Mellon Transition Management Services, San Francisco, agreed that until recently, pension plan assets were moving into emerging markets.
"People have been thinking about different ways to either exit the U.S. and invest internationally or exit emerging (markets) and go back to developed markets," he said. "We've seen a lot of that over the last few weeks given the performance of the markets."