In 2002, institutional investors, a group that includes pension funds and endowments, had 46.8% of assets invested in domestic equity, marking the third year of declines: from 49.4% in 2001 and 52.9% in 1999. This decline represents a move in assets of active common stocks to $1.25 trillion from $1.50 trillion, according to data from consultants Greenwich Associates.
Some of the decline is being attributed to declines in domestic equity holdings inside defined contribution (DC) plans. In 1999, the average DC portfolio contained 53% of its assets in domestic equity. By 2001, that number had fallen to below half.
Within domestic equity, funds continued to diversify their assets across styles and market cap. The proportion of assets invested in index funds was the only category to gain in 2001, to 39% from 37% in 2001. Both small-cap value and mid-cap value held true to 2001’s allocations: 5% and 3%, respectively. Otherwise, allocations declined in all other categories:
- large-cap value declined to 15% from 16%
- large-cap growth fell to 16% from 19%
- mid-cap growth lowered to 2% from 3%
- small-cap growth deteriorated to 4% from 5%
- enhanced index dropped to 6% from 7%.
Of course, the bigger picture is that investors are simply looking for positive returns anywhere they can find them. “After three consecutive years of poor performance, funds are seeking diversification and higher returns in other asset classes,” the Greenwich Associates report said.
One of the big winners was fixed income, rising to 27.8% of assets in 2002 from 26.4% in 2001 and 24.9% in 1999, although the move into bonds does not appear to be strategic. Assets invested in bonds declined, just not at the same rate as those in equities, down 4% in 2002 to $1.4 trillion. This move seems to signify investors are poised to move back into domestic equities, as it marks profit taking from fixed-income investments to invest in stocks.
Examining what types of bonds were attracting the assets revealed institutional investors put 63% of their assets in domestic core mandates and 21% in domestic core-plus mandates. The rest of the bond investments break down as follows:
- high yield bonds (7%)
- international bonds (4%)
- global bonds (3%)
- private placements (2%).
Other gains were seen in guaranteed investment contracts (GICs) and stable value investments, with their assets rising to 3.8% from 3.1% in 2001 and equity real estate, advancing to 3.4% from 3.1% in 2001.
Also gaining ground, even though they represent a small portion of overall investor portfolios, were alternative investments. Investments in hedge funds edged up to 1% from 0.6% in 2001, while those in private equity totaled 3.1%, unchanged from 2001 but up from 2.9% in 2000. Overall now:
- 40% of all funds utilize private equity investments, up to 60% in foundations and endowments
- 20% of all plans use hedge funds, up from 15% in 2001. The number is 60% in foundations and endowments, up from 50% last year.
Among investors in private equity, the average allocation is 5% at corporate and public funds and over 10% in endowments and foundations. Looking at hedge fund investments reveals a similar trend, where allocations to hedge funds from endowments are now at 15%.
International stock also held steady from 2001’s 11.2%.
Public, Private, Endowment
Corporate pension funds were particularly hard hit in 2002, where total assets fell 14.6% to $1.15 trillion. Not surprisingly, corporates were also the most heavily invested in domestic equities, where 52.5% of total corporate assets were devoted to this class, down from 55.1% in 2001 and 57.3% in 2000. Much of the decline was felt in the DC plan holdings. Broken down, corporate funds held:
- 22.3% in fixed income
- 9.7% in international equity
- 7.8% in GIC/stable value
- 2.3% in equity real estate
- 1.9% in private equity
- 0.4% in hedge funds
While not as precipitous as their corporate counterparts, public pension funds experienced a 9.3%-decline in total assets in 2002 to $1.65 trillion. Looking at public plans’ holdings shows a 44.1% share in domestic equities and a 32.6% share in fixed-income. Other investments were held in:
- 12.2% in international equity
- 4.2% in equity real estate
- 3.1% in private equity
- 1% in GIC/stable value
- 0.1% in hedge funds
Faring the best among the three categories were endowments, as assets fell only 6.3% to $206 billion in 2002. These plans were also the biggest drivers in a move toward alternative investments, where private equity makes up 8% of asset allocations and hedge funds are close behind at 7.8%. The remaining assets were allocated to:
- 35.8% in domestic equity
- 27.5% in fixed income
- 12.5% in international equity
- 4.2% in equity real estate
Greenwich Associates data is based on interviews with 574 corporate pension funds, 246 public pension funds and 212 endowments and foundations for the study conducted between August and October of 2002.