Portfolio diversity: overseas stake
When pension funds go abroad, no one stands at the dock. No bands play, no handkerchiefs wave in the breeze.
But the fact is, about $7 billion worth of corporate pension fund assets are invested in international markets today. While that sum is only 1 percent of total pension fund assets in the United States, it is almost $7 billion more than three years ago.
In recent months pension fund managers have slowed the flow of money into overseas markets. The two reasons most often cited are the strength of the dollar and depressed foreign markets. With the Dow Jones industrial average recently roaring to record levels, and amid some predictions that it may go to 2 ,000 before this bull market is over, many money managers are rethinking having their eggs in a foreign basket.
''We will probably increase investment in US real estate before the international market,'' says Greta Marshall, director of investments at Deere & Co., a machinery manufacturer. Of the total $1.2 billion in Deere's pension assets, less than 2 percent is invested overseas.
She cites two reasons. First, ''We have to pay out pensions in dollars. If we're dealing with foreign currencies, our assets (the overseas investments) may not match our liabilities (pension payments).''
The second reason is that Deere has plenty of foreign exposure already, since it manufactures tractors and machinery overseas. Producing and selling abroad, she says, ''insulates the pension fund from needing diversification.''
At Celanese, they take a different view. This paper and plastics manufacturer has about 5 percent of its pension assets overseas - an average amount for large companies with internationally diversified portfolios. But over the next five years, predicts Charles Stephens, assistant controller, American companies will probably dish out 15 percent of their pension fund assets into foreign investments. ''It's not going to be a stampede, but a slow steady growth,'' he adds.
Mr. Stephens believes the problems of fluctuating currencies and mismatching pension liabilities and assets should not stop a company from investing abroad. ''Currencies do come back to normal relationships,'' he notes. ''The pension game is a long-term one, and the long-term trend is toward diversifying.'' Pension liabilities do not have to match their assets, he says, because a company pays out pensions over a long period, perhaps 40 years, making day-to-day fluctuations in currency less traumatic.
He further points out it is in the interest of US companies to invest abroad, since they are increasingly affected by what is happening overseas.
Chris Nowakowski, president of InterSec Research Inc., a Greenwich, Conn., consulting firm, likens corporate investing to a pendulum. At one end of the arc is diversification - spreading the risk over both US and foreign markets. At the other end is ''incremental rate of return'' - going with the stocks and bonds and other forms or investment that bring the greatest return.
During the last two years, he says, companies have been ''badly burned'' in markets overseas, mainly because the dollar ''took such a beating.'' Since portfolio managers saw their return on international equities was much lower than the returns from US investments, ''people reassessed the value of overseas markets, and began to grow their international portfolios less rapidly.''
But Mr. Nowakowski feels the diversification argument - spreading the risk - is the most important reason for investing abroad. ''Half of the swimming pool is outside this country,'' he says. ''There's about as much logic in not investing abroad as in only investing in companies A through M on the Big Board.''
And some think now may be a good time to invest abroad. ''With the yen significantly undervalued and the dollar overvalued, this may be an attractive time to buy Japanese,'' says Mr. Stephens.
The statistics appear to agree with him. According to a survey by Peat, Marwick, Mitchell & Co., an accounting and consulting firm, funds in 21 internationally diversified portfolios - both American and foreign - have been flowing into the US market since the end of February. That occurred, says William Dreher, a partner at the accounting firm, in part because the US market was ''underweighted'' - that is, the US, which has 53 percent of the world's capitalization, had only 39 percent of the money in these specific portfolios at the end of February. But as of the end of June, America's share had increased to 45 percent. And by now, Mr. Dreher believes, the US may have its fair share of these world's investment dollars.
In contrast, Japan's share fell from 24 percent to 17 percent.Japan's slippage cannot be blamed entirely on the strong dollar and relatively weak yen, Mr. Dreher points out.Japan has suffered more during this recession because its domestic market is smaller and more at the mercy of the world economy than that of the United States.