Defined benefit plans slowed the pace of their move overseas over the first five months of 1999, consultants and others note.
Reasons for the easing ranged from plan sponsors' fear caused by last year's fall in emerging markets to pension fund executives taking a harder look at active managers, many of which are having a harder time beating the EAFE benchmark.
But unlike many other investors, pension plan sponsors did not spend the end of 1998 and beginning of 1999 yanking money out of foreign investments. Instead, those that tinkered with their international investments largely changed their portfolio emphasis.
As their thinking about investing overseas evolves, U.S. pension funds have been fine-tuning their international investment programs.
The California Public Employees' Retirement System, Sacramento, is slated to examine its international program in September and may write an RFP for a "risk controlled" or international enhanced index manager, sources said. As of March 31, CalPERS had $33.5 billion, or almost 22%, of its assets invested internationally, according to the system's Web site.
The $1.1 billion Louisiana Municipal Police Employees' Retirement System, Baton Rouge, in June hired Nicholas-Applegate and Invista to run $110 million in core mandates tied to the Morgan Stanley Capital International Europe Australasia Far East index while firing international regional managers Scudder Kemper Investments Inc., Schroder Capital Management International Inc. and Morgan Grenfell Investment Services Ltd. The system maintained its exposure to international equities at 10% of the fund.
The new managers may invest up to 20% of the portfolio in emerging markets, but they are not likely to invest that much, said Cindy Potter, senior vice president, Summit Strategies, the system's consultant. The move was due to a restructuring of the fund's international program, she said.
And the Washington State Investment Board, Olympia, has changed its target international equity mix to 50% active and 50% passive from 65% active and 35% passive, said Christopher Ailman, chief investment officer for the $51.2 billion system. At the end of March, however, Washington State's allocation was the opposite of its target, at 65% passive and 35% active.
Placements of international managers were down in the first quarter compared with the same period in 1998, according to Eager Manager Advisory Services' Tracker database.
In the first three months of this year, Eager counted 49 international manager hirings by pension funds, endowments and trusts. The tally was 71 for the same period in 1998.
Eager's data represent only 10% to 15% of the total placements in the market, said Bob Stein, an associate consultant with Eager in Louisville, Ky.
William M. Mercer Investment Consulting, Chicago, has seen a similar trend. The firm handled 40 international manager searches in 1998, but only five through May 31 of this year, said Andrew Rasmusen, principal.
One of these searches was in emerging markets, he said, while the rest were EAFE mandates. Last year, six of the 40 searches were for dedicated emerging markets mandates.
Possible explanations for the slowdown include general investor satisfaction with performance and the possibility that some are waiting for Jan. 1, 2000, to pass, he added.
But searches across the board at Mercer were down in the first five months of the year, he said.
Ennis, Knupp & Associates, Chicago, handled 10 international manager searches in 1998 and only four in the first part of 1999, said Sue Rutherford, a principal in Chicago. Three of those four were for pension funds looking for managers to run portfolios tied to the MSCI ACWI (ex-U.S.) index.
Ennis, Knupp, along with several other consultants, adopted the benchmark recently (Pensions & Investments, May 3).
In contrast, BARRA RogersCasey has seen the number of searches for international managers rise this year.
Through the middle of June, the firm had interviewed 149 managers for its close to 100 tax-exempt clients for which it handles international searches, said Patrick Rudden, director of equity research in Darien, Conn. Through June 1998, it had interviewed 138, he said. To complete a search requires four or five manager interviews. And he predicted an increase in manager searches in the third quarter after a second-quarter pickup in search activity.
BARRA "was not on board with" the MSCI ACWI index, he said, so its searches were for dedicated Europe or Pacific Basin managers.
Others are seeing the same amount of activity as last year.
Money manager Barclays Global Investors has seen "about the same number of RFPs" as last year, with an increase in ACWI mandates, said Steven Schoenfeld, principal and head of international equity strategies in San Francisco. BGI also has seen a net inflow into emerging markets funds this year. The trend picked up in March with clients from the United States, Netherlands, Asia and Canada making commitments.
The cutback in searches and hires has not translated into pension funds reducing their allocations to international equities as an asset class, many said.
Away from regions
Along with changing its allocation to active and passive investing internationally, the Washington State Investment Board decided to move away from managers investing in specific regions or styles, Mr. Ailman said. It did not renew the contract of Mercury Asset Management, which was running a $515 million portfolio with an international small-cap bias, he said. Its new managers, operating under the broad MSCI ACWI ex-U.S. benchmark, have license to invest in international small-cap stocks much more opportunistically. Putnam Investments, one of seven active managers hired, has license to invest 10% of its $700 million international equity portfolio in international small-cap stocks, Mr. Ailman said.
A total of $2.6 billion was allocated to the new managers.