GLOBAL - The industry debate regarding the importance of countries and sectors has taken a step forward with leading industry players in the US predicting that US pension funds will move to a global approach within five years.
Plan sponsors in the US will no longer think along international and domestic lines.
“US pension plans will abandon domestic and international investments in the next five years. It makes no sense now and it will increasingly make less sense in the future,” said Joanne Hill, managing director, derivative trading and research at Goldman Sachs in New York.
She pointed to the US mutual fund industry as an example of this trend.
“The mutual fund industry has moved away from US growth funds towards global funds. The mutual fund industry moved quickly and now pension funds are beginning to move,” she said, highlighting recent decisions by IBM and GM to move to this structure.
Hill added that for global large cap stocks the country of domicile is almost irrelevant.
“Plan sponsors will increasingly be thinking of large European stocks as comparable to large US stocks,” she said.
“It is starting to happen, but it is a long haul,” said Carol Parker, director of Intersec Research.
“It will come gradually,” said Michael Howard, senior consultant at Mercer Investment Consulting in Chicago.
“Plan sponsors will become indifferent regarding international and domestic, especially for large cap. Small cap will still be regional.”
Several recent studies have shown that industry allocation and stock selection are now the most important factors determining the performance of non-US equity portfolios. This trend is believed to be on the rise as a result of globalisation and increasing correlation between world equity markets.
But some in the industry disagree; not only regarding time-scale but also on whether this will happen at all.
“I don’t agree that global mandates will increase,” said Neil Rue, principal at Pension Consulting Alliance in the US.
“Some managers are structuring that way but I can’t see plan sponsors structuring that way within five to 10 years.”
Nizam Hamid, director of Deutsche Bank Securities went further, believing that although US plans are increasingly seeking international exposure, this will be along existing domestic and international mandate structures.
“Global mandates are extremely unlikely due to the currency risk. Hedging currency risk is obviously available but this just adds to the cost of simply tracking the benchmark.
“Plans’ approach to currency risk means this will not happen in the next 10 to 15 years; 58% of the MSCI World Index is made up of the US anyway.” He added that many large cap US stocks, such as Microsoft, already give plan sponsors global exposure.”
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