GLOBAL - A new survey shows that pension funds worldwide are shunning domestic stocks.
According to US-based consultants Greenwich Associates the findings suggest that funds are adopting similar investment trends in the wake of shaky market performance.
“We certainly don’t expect rapid and dramatic shifts, but we do expectpractices everywhere to come closer to global approaches during the next five to ten years,” said Greenwich consultant Chris McNickle.
Some of the key shifts, outlined in ‘Slow Steps Toward A Global Standard’ include a greater use of indexation, of defined contribution plans, and of specialist managers.
“Most remarkable has been a universal trend away from domestic equities in the wake of falling stock market performance and an apparent belief better returns can be found outside one's own borders,” said Greenwich Associates’ Bill Slocum.
The report highlighted that:
- Plan sponsors in most major markets had reduced their commitments to domestic stocks during the past 12 months - in the US, from 52% of assets to under 50%; in the UK, from 46.5% to 42.7%; in Japan, from 33% to 31%. But investors in continental Europe increased their usage of pan-European stocks, “but at 21% such use remains exceptionally low.”
- The number of funds using international equities is expected to double in 2003. But the use of US equities has shown a “significant decline” in most countries.
Greenwich Associates consultant William Wechsler said that, in part, this cut reflected concerns arising from corporate scandals at companies such as Enron and WorldCom.
“They [investors] are more hesitant about getting into a game they sense may be rigged against outsiders,” he added.
- In most markets, pension funds expecting to increase their use of private equity and hedge funds outnumber those expecting to decrease these investments by at least 3:1.
- Passive investment is also on the up, driven by concerns about the ability of active managers to outperform. In Japan, the proportion doing so has shot up from 40% to 60%; in the UK from 43% to 53%.
- In the UK and Canada, growth in DC use has slowed, but corporations in continental Europe and Japan expect it to continue.
“Despite the negatives now apparent in the approach taken in the US, DC appears to be the only game in town,” added Wechsler.
- There was a slight increase in the average number of managers that pension funds are using, due increased use of the core/satellite model, with the subsequent hiring of additional specialist managers.
Earlier this year, Greenwich Associates conducted 1372 interviews with pension funds across Europe, North America, Japan, and Australia. Interviews were also conducted in 2001 with 1,445 funds in the US.
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