A strong domestic stock market and an increased emphasis on international equity investment led a number of the nation's 200 largest pension funds to increase their stock allocations during the past year, moving assets from fixed income and cash to achieve better performance.
The Top 200 funds allocated an average of 51.3% of their defined benefit assets to equities in the year ended Sept. 30, compared with 48.3% during the same period in 1992. The next 800 funds allocated on average 51.5% in 1993 and 48.4% in 1992. On average, the Top 1,000 funds allocated 48.9% to equity in 1993, compared with 48% in 1992.
The one-year return on the Standard & Poor's 500 Stock Index was 13% as of Sept. 30. The Morgan Stanley Capital International Europe Australasia Far East Index rose 26.75% for the same period.
Some pension executives sought to fully invest up to their target equity allocations, while others increased equity targets they felt had been low.
The Retirement Systems of Alabama, Montgomery, boosted its equity allocation 14 percentage points, to 32% from 18% in 1992.
Cheryl Duke, director-equities, said the $12 billion fund was able to increase its equity allocation when a 20% investment cap was lifted by the state Legislature last spring.
"The 20% cap was very low, anyway, and well below the percentage that the average state fund was allowed to invest in, so we just felt that moving above the 20% was the right thing to do," said Ms. Duke.
The average defined benefit plan stock allocation among the 67 funds in 1993's Top 200 was 45%, while the average for the 70 state and local funds in 1992's Top 200 was 41.6%.
Another big mover, the Public Employees' Retirement System of Mississippi, Jackson, went to 46% equities from 39% in 1992. Eddie Vandiver, deputy director-investments, said the $7.1 billion fund made a conscious investment decision, believing it did not have quite enough in equity, and shifted assets from fixed income and cash.
He added the equity allocation is expected to increase further this year, and the fixed income allocation should drop as a result. The fund's objective is to hold 45% in domestic equity and 7.5% in international equity. Mr. Vandiver said the fund is below its target on international equity and domestic large-capitalization stocks. The Arkansas Teachers Retirement System went to 57% equities from 47%, but it did not change its allocation. Rather, the $3.5 billion fund emphasized investment in equities, rather than cash, among the fund's managers, said Bill Shirron, executive director. The Little Rock-based fund is moving toward fully investing up to its target allocation of 60% equities and 40% fixed income, he said.
Mr. Shirron said the fund does not anticipate any changes in that target allocation in the near future, but it is searching for an emerging markets manager to actively manage an $85 million allocation to come from cash reserves.
Even with the possibility of a stock market correction, equities will outproduce the rate of inflation in the next couple of years, while bonds will return less because of the interest rate environment, said Frank Foy, fixed-income investment officer of the New Mexico Educational Retirement Board. The Santa Fe-based fund changed its allocation to 30% equities from 23%.
And the fund is contemplating a larger increase to 38% by shifting cash flow and partially through a reduction of fixed-income securities. The increase will be split evenly between domestic and international equities, most likely in commingled accounts.
But the increases don't mean plan sponsors are bullish on the U.S. stock market. They say they are just not as bullish on fixed income as result of the prevailing interest rate outlook.
"Bullish may be too strong a word. Optimistic" is better, said William H.S. Preece Jr., director-employee financial programs at Abbott Laboratories, Abbott Park, Ill. The $3.3 billion fund went to a 50-50 equity-fixed income split from 26% equities and 74% fixed income.
"We had gone light on stocks in late 1992 and we moved some money," said Mr. Preece. "It will be a more typical stock exposure for the foreseeable future."
The fund had "quite a ride" on the bond market in the past, said Mr. Preece, adding he is not expecting the same returns from the bond market in the near future. Equities seem a good alternative right now.
"I think the (stock) market is somewhat high, but I don't think there are a whole lot of alternatives," said Mr. Preece. "I would see a stronger expected return from any kind of equity in general over fixed income right now."
Many equity increases are coming from growth in international equity allocations. RJR Nabisco Inc. went to 63% equities from 53%, helped by increased international exposure, including new investments in emerging markets. Ed Robertiello, senior manager-pension and benefit investments, said the $3.89 billion plan is reducing its U.S. equity exposure by using its managers to shift assets from domestic to international equities.
"We feel that the U.S. equities are somewhat overvalued. They've had a great run vs. the international equity, and we feel there's going to be a reversion to the mean. International (equity) should outperform the U.S.," he said.