Developed, emerging markets stocks both enjoy solid increases

For many of the largest U.S. pension funds, it seems, the world — particularly the developing one — is their oyster.

Among defined benefit funds in the nation's 200 largest retirement plans, assets invested in emerging markets securities jumped 33% to $146 billion for the 12 months ended Sept. 30, according to Pensions & Investments' annual survey.

The boost in emerging markets was powered by equities, which saw a 29.6% gain to $127.9 billion, while debt, though smaller by assets, saw a much larger percentage increase, 62.5%, to $18.2 billion.

Meanwhile, global equity increased 14.6% to $97.3 billion, active global/international bonds rose 6.4% to $71.1 billion and active international equities gained 12.9% to $371.8 billion.

When adjusted for the market, emerging markets equity was up 10.5%; emerging markets debt gained 34.7%; global/international bonds rose 1.3%; global equity dropped 5.8%; and international equity fell 6.2%;. The MSCI All-Country World index was up 21.73% for the 12 months ended Sept. 30; the MSCI Emerging Markets equity index, 17.25%; the MSCI EAFE, 14.86; Barclays Global Aggregate Bond index, 5.07%; and the J.P. Morgan Emerging Markets Bond index, 20.59%.

Among the biggest shifts reported in emerging markets equity were the $88 billion New York State Teachers' Retirement System, Albany, reporting $2.31 billion as of Sept. 30, up from $165 million a year earlier, and the $25 billion defined benefit plan of United Parcel Service Inc., Atlanta, which is reporting $1.3 billion in emerging markets equity, up from $754 million.

In global equity, the bigger shifts included those of the $21 billion Mississippi Public Employees' Retirement System, which reported $1.18 billion, up from $267 million, and UPS, reporting $2.4 billion from $462 million.

In aggregate, defined benefit plans in the top 200 had 2.8% of assets invested in global equity as of Sept. 30, up a tick from 2.6% a year earlier. Corporate plans within that universe had an average 2.3% invested in global equity in the latest survey, up from 1.8%; public plans, had 2.8%, up only 10 basis points; and union plans had 6.3% invested, compared with 5.6% a year earlier. In international equity, the aggregate investment among defined benefit funds was 18.2%, up from 17.4%. Corporate plans were at 14.9%, up from 13.5%; and public plans, at 19.1%, were up from 18.4%. Union plans, however, saw a slight drop, to 10.3% from 10.5%.

“More and more, we're seeing with our clients the global shift in allocations,” said Thomas McAuliffe, managing director and head of global investment consulting for Bank of America Merrill Lynch, New York, which manages $48 billion in pension assets, mostly for corporate and Taft-Hartley plans. “Emerging markets has also been a big play, and no surprise it's more on the equity side.”

Pension funds have gone into international, emerging markets and global equity in part because of more confidence in markets in general, added Joshua Levine, New York-based managing director and co-head of U.S. pensions for BlackRock Inc. “Pension funds that historically have been underweight in those sectors are now looking at getting more diversified,” Mr. Levine said. “They now understand the risks of international and emerging markets to a degree they never have before.”

And institutional investors are taking that added knowledge and applying it into their overall investment portfolios. Russell Ivinjack, partner and chair of Chicago-based Hewitt EnnisKnupp's U.S. investment committee, said his firm is advocating to its clients that they reallocate their equity investments to 45% U.S. and 55% international, the approximate allocation of the global equity market.

For example, the Massachusetts Pension Reserves Investment Management board, Boston, led the top 200 in assets categorized as global equity, at $24.042 billion as of Sept. 30. MassPRIM's global equity portfolio comprises suballocations of 17% to developed international equities, 15% domestic large-cap, 7% emerging markets and 4% smidcaps, said Michael Trotsky, executive director and chief investment officer, in a telephone interview. Combined, the global equity portfolio returned 17.5% for calendar year 2012, he said.

Mr. McAuliffe said that measured pace will continue. “I see the global play as a longer-term trend,” he said. “We talk all the time about the shift from country-specific to global.”

However, recessionary problems in Europe have weighed on global returns, which affected investors who got into global equities “late in the game,” Mr. McAuliffe said. “Our clients give us feedback and say, "Yes, you say the global shift is here,' but by the time they did something they felt the effects of the slump in Europe,” he said.

Still, the global economic rebound from the financial crisis of 2008-2009 has helped move more investors to global equity — and into emerging markets as a more strategic allocation for both equity and debt, said Mr. Ivinjack.

“We expect continued interest in emerging markets as well,” he said. “The broad reason is that those countries' markets are growing and becoming a larger portion of the global market. The dollar increase in assets over the year is the result of some plans adding dedicated allocations to emerging markets equity and debt. Smaller plans, meanwhile, are including emerging markets in other allocations, like global equity.”

While global equity is a more long-term investment, Mr. McAuliffe said, emerging markets is more cyclical. “If investors were exposed to emerging markets earlier, they'll increase their exposure and will stay in. For others, long-term exposure will vary.”