Global equity gaining favoras new option

Defined contribution plans increasingly are turning to global equity funds as an investment option, while a relative handful are starting to adopt enhanced indexed equity options.

Roughly 14% of corporate defined contribution plans offer a global equity fund, up from 12% a year ago; according to data from Hewitt Associates LLC, Lincolnshire, Ill. Less than 1% offer an enhanced indexing option.

The $24 billion 401(k) plan sponsored by General Motors Corp., Detroit, and the $1.5 billion 401(k) plan of Continental Airlines Inc., Houston, are among those with dedicated global equity funds.

Consultants say that plan executives are looking at global funds to diversify more than ever in light of the struggling U.S. capital markets.

Pamela Hess, defined contribution practice leader for Hewitt, said that while international options are extremely prevalent in DC plans, global funds are just starting to gain traction.

“What we've seen is the rationalization of the fund lineup being kept simple, but that said, there's a growing awareness that the markets are global and investing could go beyond the U.S.,” said Ms. Hess. Global equity funds also offer the portfolio manager more flexibility to invest opportunistically.

Participants' use of global equity funds is good but will improve with more investment education and communication, she said. Among plans that offer global equity, 6% of plan assets are invested in that option.

But Joseph Masterson, senior vice president at Diversified Investment Advisors Inc., Purchase, N.Y., said he sees little use for global equity in DC plans. “Out of 1,500 clients, less than 1% (of plans) have a global fund,” said Mr. Masterson.

Watson Wyatt clients are beginning to ask about the option. “It's definitely something we're (in the early stages of) seeing,” said Mark Ruloff, director of asset allocation at Watson Wyatt Worldwide Inc., Arlington, Va.

Global equity investments are commonly found embedded in target-date funds, said Mr. Ruloff.

“Global equities can help diversify risk. It's not necessarily something you would want participants to invest 100% in. Many plans like global equity exposure in target-date (funds) and hire managers that utilize it,” he said.

Managers including Russell Investments Inc., Tacoma, Wash., and UBS Global Asset Management Inc., Chicago, offer global equity as part of their custom target-date funds.

Drew Carrington, executive vice president and head of defined contribution and retirement solutions at UBS, said global equity could make a strong component of a target-date fund. “It's a great diversifier,” he said.

As for enhanced indexing, there has been some early interest but not a lot of action, said Hewitt's Ms. Hess.

According to Pensions & Investments' annual survey of the top 200 retirement funds, DC plans among the top 200 had $4.9 billion invested in enhanced indexed equity as of Sept. 30.

“With indexing in general, there's been a lot of talk,” said Ms. Hess. “Enhanced indexing has gotten a lot of traction on the DB side. If a plan could leverage their DB managers for DC, some larger plans may do that.”

Enhanced indexing is attractive to DC plans because they achieve a little extra reward for a moderate amount of risk, said Ms. Hess.

Watson Wyatt's Mr. Ruloff agrees that larger plans are more likely to unitize enhanced indexing managers from their DB plans. “It makes sense that some would want to leverage their DB managers,” he said, adding that it's very early in the process for some plans.

One challenge preventing plan executives from offering global equity and enhanced indexing options is communicating the virtues of these investment options to plan participants.

“These are not easy classes to communicate to employees. We continue to see the number of funds offered rising, but it's all about the fund usage. These may not be used because they are challenging to understand,” said Ms. Hess.

The plans likely to offer the options are financial services companies, those with in-house asset management and ones with a large number of investment options.

“(Like) with everything else, the savvier plans are going to have more niche asset classes like emerging markets, global, real estate and the like,” said Ms. Hess.

Contact Jenna Gottlieb at [email protected]