Several of the nation's largest pension funds doubled and tripled their international stock allocations in the year ended Sept. 30, helping to boost international equity assets of the top 200 defined benefit plans nearly 33%.
International equity assets of the top 200 defined benefit plans ranked by Pensions & Investments rose to $130.839 billion from $98.612 billion in the 12-month period. To be sure, the Morgan Stanley Capital International Europe Australasia Far East Index had a solid year, gaining 10% during the period. But even adjusted for market growth, international equities increased 20.6% during the period. Coming from a much smaller base, bonds also surged, increasing 30% to $34.436 billion from $26.484 billion. The market-adjusted growth narrowly exceeded that of equities, rising 33.5%, as the Salomon Brothers Non-U.S. World Government Bond index fell 2.6% in the year ended Sept. 30.
Public funds ranging from the state funds of New Jersey to Washington had the biggest gains, but corporate funds such as Sears, Roebuck & Co., USX Corp. and Johnson & Johnson, also upped the ante.
Total defined benefit international assets, including stocks, bonds and other investments, rose 32% to $167.444 billion from $126.891 billion.
For the top 200 defined contribution plans with international assets, the growth was more modest but still healthy rising 20.7% to $19.75 billion from $16.363 billion. Of the total, equities rose 34% to $18.134 billion from $13.545 billion. The market-adjusted gain was 21.7%. Bonds plunged 49.9% to $1.388 billion from $2.768 billion. The market adjusted loss was 48.5%.
Among the biggest changes in the 12 months:
The $13 billion Pennsylvania State Employes' Retirement System, Harrisburg, doubled its target allocation to international equities to 10% from 5%.
The foreign fixed-income total remained about the same. It hired new managers for core non-U.S. equities in the fourth quarter, as well as an international small-cap specialist, according to Peter Gilbert, chief investment officer. "In the next year, we will be evaluating the structure of the international program. That will determine whether to look at other firms. We also will be increasing the percentage. Our five-year plan calls for additional increases stepping up over the next couple of years to 20%. We'll be dollar cost averaging into that," Mr. Gilbert said.
"What we will look at toward the end of next year is the basic approach," which is core non-U.S., small cap and regional. "We will evaluate whether to expand the regional focus," he said.
The $44 billion New Jersey Division of Investment, Trenton, took advantage of the state Legislature's lifting of restrictions on investments in companies with ties to South Africa last year to boost international stocks. Now almost 50% of the $36 billion state pension fund's $4.2 billion international portfolio, as of year-end, is stocks. By contrast, at the beginning of last year, virtually all of the portfolio was bonds, because bonds - in contrast to many large-cap European stocks - were hardly affected by the South Africa restrictions.
"Cash flow has virtually all been going into international investments in the last year and a half to two years,"said Roland Machold, director.
At the beginning of 1994, he thought the relative value of international stock markets was more compelling than domestic, and Mr. Machold's 1995 outlook is similar.
"U.S. markets had already rallied and it looked like they'd be stagnant for a while and still does," he said.
"We will keep between 45% and 55% (of international in stocks) in line with our domestic stock allocation."
Returns also helped boost assets. The internally managed fund added value to overseas portfolios by increasing currency hedges when the dollar began to rally in the third quarter of 1994.
"I believe we outperformed EAFE this year quite substantially," he added, noting year-end figures were not available yet.
Philip Halpern, chief investment officer of The State of Washington Investment Board, Olympia, said its 14-fold increase (to $1.357 billion in foreign equities from $90 million a year earlier) was "a strategic decision rather than a tactical decision." A year and a half ago, the fund reached its 5% target for international. In 1994, with the board's approval, the allocation was increased to 15%. In addition, the board decided it would put 15% of that foreign allocation into emerging markets. It is deciding whether to include regional or broad-market specialists and whether to include a passive component. The fund also might look at adding currency-related strategies in 1995.
In the year-earlier period, Washington's $181 million in foreign investments was split evenly among stocks and bonds. It hasn't changed its small foreign bond exposure but includes it as part of a global balanced account.
Washington's core portfolio includes a customized EAFE account and active regional portfolios, split 50-50 among Europe and Pacific Basin markets. Fund officials make tactical country shifts for the passive portfolio, managed by State Street Bank & Trust Co., with input from several advisers.
Charles Elmer, director of benefits investments of PPG Industries Inc., Pittsburgh, said returns were a big factor in his fund's 71% rise in international equities to $149 million from $87 million.
"We did increase our commitment" to foreign stocks, he said.
But "part of it is a fairly high 1993 return. We had a significant 1993 return on emerging markets. Everybody did. We also increased exposure to emerging markets during late 1993 or early 1994. Over the year those things went up 70% to 80%."
About half of PPG's international investments - representing 6% of fund assets - is in emerging markets.
Among other corporate defined benefit funds that saw big gains in foreign equities were Sears, Roebuck, with 172%; Johnson & Johnson with a 30% increase; and USX, with 24.8%.