Searching for world-beaters

For most of the past decade, the $1.3 billion Minneapolis Employees Retirement Fund has passively invested more than half of its assets. While its faith in low-cost indexing has not wavered, its approach to active stock investing changed last January, when the fund made its first allocation, of $130 million, to a global equity strategy. The Minneapolis plan moved assets from three U.S. and international equity portfolios to one global equity portfolio managed by Los Angelesbased Capital Guardian Trust Co.

"We are giving one good manager with a big reach the chance to actively manage both domestic equity and international equity," says Judith Johnson, executive director and chief investment officer at MERF, which uses only ten managers, seven of them active. "It is a way for us to earn extra alpha and still maintain a small group of managers."

The Minneapolis retirement plan is one of a growing contingent of U.S. and overseas investors that are devoting a larger share of their portfolios to global equity strategies. About 14 percent of U.S. pension funds made allocations to global mandates in 2003, according to a survey of 1,000 institutional investors by Connecticut consulting firm Greenwich Associates. That's up from 9 percent in 2002. In the U.K., the firm reports, the taste for global is more developed: Last year 27 percent of 433 pension funds reported global mandates, up from 24 percent in 2002.

Among the biggest money managers in this field: Alliance Bernstein, Axa Rosenberg Group, Capital Guardian, Fidelity Investments, Templeton Investment Counsel, UBS Global Asset Management and Wellington Management Co.

What these firms offer is the chance to generate alpha, or market-beating returns. Increasingly, pension funds think that their practice of dividing money managers into neat categories -- so-called style boxes -- constrains portfolio managers, who become obsessed with matching the performance of a narrow benchmark. Encouraging their asset managers to search globally for alpha may deliver better results, many plan sponsors now believe.

Says MERF's Johnson: "We've had too many manager boxes with too many parameters. Then when managers underperform, we fire them."

Last July the Florida State Board of Administration, with $100 billion under management, allocated 4 percent of plan assets to a global equity portfolio managed by six firms, including the Bank of Ireland, Templeton and UBS. It was the first time the Florida state retirement plan had assigned a global stock mandate.

Other plans are upping the ante. In March the $12.7 billion State Universities Retirement System of Illinois increased its global equity allocation to 5 percent, up from 1.5 percent at the start of the year. The reason: outperformance. The plan's two managers, Capital Guardian and Wellington, have generated returns of 10.4 percent since SURS made its first allocation in May 2002, versus a 7.3 percent return for the MSCI world index.

"We just felt like the boundaries between U.S. and non-U.S. were really artificial," says John Krimmel, the plan's chief investment officer. "By removing them, we allow a manager to own the best company in its industry without regard to where it is located."

Money managers appreciate the vote of confidence. "With a global equity mandate, we have an opportunity to find the best approach to looking for undervalued companies," says Cindy Sweeting, a research director at Templeton, which has $46 billion under management, with $8 billion in global mandates.

“一个论据支持全球是你delegate all of the investment-oriented decisions to someone who has the capability to make them," says Churchill Franklin, an executive vice president at $6.5 billion Boston-based global specialist Acadian Asset Management. "If you spread your investment decision over a wide enough playing field, you can add more value."

The relative performance of stock markets during the past two years has encouraged a global approach. The MSCI Europe, Australasia and Far East index gained 33.8 percent last year, versus 28.7 percent for the Standard & Poor's 500 index; that was the second straight year the world index outperformed the S&P. According to a study by Ennis Knupp & Associates, an investment consulting firm in Chicago, the MSCI world index has outperformed U.S. stock markets in 17 of the past 32 years.

"Taking a country approach just doesn't work when you're trying to control risk and maximize gains," says Jennie Paterson, the London-based director of global sales and marketing at Axa Rosenberg Group, which has $4.5 billion of its $42 billion in assets in global mandates. "If you have a regional structure, you might be adding value in one region but not another," Paterson says. "It adds another level of complexity and increased risk for maybe a marginal increase in returns."

Increasingly, investors are focusing on the global forces driving the performance of industry sectors in specific country markets. Notes Richard Ennis, a principal at Ennis Knupp: "In the global economy, market segmentation is vanishing in the name of economic efficiency. Once that happens, there is less justification for a focus on stocks in any given country."

For some pension plans global equity investing is part of a broader push for more effective risk management. Take the U.K.'s $1.1 billion Shropshire County Pension Fund, which ran a funding deficit of about 20 percent in 2003. In an effort to boost its risk-adjusted performance, the plan last year increased its fixed-income allocation from 20 percent to 25 percent and reduced its overall equity holdings from 75 percent to 60 percent. At the same time, it introduced a 10 percent alternative-investment allocation to two funds of hedge funds, London-based Man Group and Seattle-based Quellos Group, assigning them global mandates. The remaining 5 percent of plan assets are in real estate.

"The main driver was risk management and diversification," says Philip Guy, head of treasury and pensions at the Shropshire plan. "We anticipate that the allocation to hedge funds to manage global equity portfolios will generate equity-type returns, but in a way that is not correlated with the way stock markets move at home."

Bill Muysken, global head of research for Mercer Investment Consulting in London, notes that "institutional investors are moving to greater diversify internationally to reduce risk." In the U.K. investors have been especially motivated to go global as their home market has become dominated by large-cap giants like BP, GlaxoSmithKline and Vodafone. This development has in effect increased the concentration of domestic portfolios, making it even more important to diversify beyond U.K. stocks.

By comparing companies across a global spectrum, the best money managers can unearth some real gems. Back in 2000, for example, Templeton bought a stake in Samsung Electronics, the South Korean technology hardware company. At the time, the stock was trading at about $170 a share, roughly ten times trailing 12-month earnings. Templeton saw what many investors didn't: a low-cost producer with a strong competitive advantage that was building its brand and successfully fighting rivals like L.G. Philips, Nokia and Sony. Recently, Samsung overtook Philips as the world's leading maker of high-resolution computer monitors. Since the Templeton purchase the stock has jumped to $461; it now represents 2.5 percent of the firm's global equity portfolio. "Without a global view, that would have been an easy stock to miss," says research director Sweeting.

Along with many plan sponsors, MERF's Johnson is looking for equally smart picks in her equity portfolio, and she's willing to give a money manager the freedom to roam the planet to find them. "When the market was going up 20 percent a year, you could make mistakes and still make money," Johnson says. "Those days are gone."