A Greenwich Associates news release said that international equity assets under management by US institutions grew about 72% over the 12-month period ending February 2006 while foreign equity brokerage commissions jumped 45% to an estimated $2.6 billion total. Pension funds are shifting assets to international equity managers as they seek to boost performance, the news release said, echoing the findings of numerous prior researchers.
According to Greenwich Associates’ most recent data, international equities grew from about 14% of total assets in the portfolios of US defined benefit pension plans in 2002 to more than 16.5% in 2005. The trend has been even more pronounced among US endowments and foundations, whose foreign stock allocations jumped from 12.5% to 17% over the same period. International shares are also getting a boost from US hedge funds, many of which are expanding the geographic reach of their operations and investments into Asia and other foreign markets.
European Equity Strength
Even as US institutions pick up the pace of activity in Asia and Japan, a significant expansion in European equity investments has increased the proportion of their total international stock holdings made up of European shares to 68% in 2006 from 60% in 2005, according to Greenwich Associates’ data.
The average European equity portfolio grew by more than 50% to $4.5 billion over the period. The typical US institution paid nearly $14 million in equity brokerage commissions related to trades of European stocks from 2005 to 2006, up from just more than $10.5 million in the prior year. That drove the total amount of European equity brokerage commissions paid by US institutions up almost 50% to $1.7 billion, the study indicated.
Although US institutions’ Asian equity assets under management increased by more than 50% from 2005 to 2006, the proportion of institutions’ total international equity holdings comprised of Asian shares fell, and the Asian proportion of international commissions was flat year-over-year.
Greenwich researchers found a similar pattern for Japanese equities, which increased on an absolute basis from $134 billion in assets under management in 2005 to $180 billion in 2006 but declined as a proportion of institutions’ overall international stock portfolios. Likewise, US institutions paid more commissions on Japanese equity trades in 2006, but commissions related to Japanese stocks trades declined as a share of the total international equity commission pie.
Australian equity assets held by US institutions also increased substantially from year to year, as did Australian equity commissions paid by US institutions. In terms of AUM, Australian equities increased 18% to $26 billion; commission payments related to trades of Australian shares increased 43% to $188 million.
US institutions are allocating increasing proportions of their international share trading commission payments to broker research and related services. For European equities, institutions increased the share of their total commission spend dedicated to research, sales coverage and direct access to corporate management teams from 49% from 2004 to 2005 to 56% from 2005 to 2006. By way of comparison, for US equities, institutions allocated 42% of their total commissions for broker equity research, sales coverage and corporate access between Q1 2005 and 2006.