Pensions Boost Domestic Equity Allocations in 2003

March 31, 2004 ( - Defined benefit schemes in the United States came back to domestic equities in 2003 at the expense of fixed-income holdings.

The domestic stock holdings of more than 1,000 of the largest corporate and public pension funds, endowments, and foundations in nation inched up to 46.9% in 2003 from 46.6% in 2002.   Also up among the $5.3 trillion in assets represented by the sample were allocations to passive stocks, now representing 18.9% of the funds’ asset portfolio from 17.5% in 2002, according to institutional financial services consultant Greenwich Associates’ 2004 report on the Asset Allocation of the nation’s pension plans.

Overall, the domestic common stock portfolios of U.S. funds expanded by over 5% in 2003, increasing from $2.4 trillion in 2002 to just over $2.5 trillion in 2003, Greenwich found.   That growth represented a turnaround for U.S. funds, which had shed just over 17% of their holdings in domestic stocks between 1999 and 2002. Across the oceans, commitments by U.S. funds to international equity remained level in 2002.  

Also up were allocations to hedge funds and real estate, while private equity allocations went down a fraction of a percentage point. Looking ahead however, a hefty 19% of funds that currently invest in or plan to begin investing in alternatives expect to boost their equity real estate assets, 23% plan to add to their private equity holdings, and 29% expect to increase their hedge fund portfolios.

At the same time, Greenwich says the time may be right for a slow down in hedge fund investments due to a recovering stock market, an inability to supply sufficient product to the largest corporate and public pension plans, and issues concerning transparency, risks, and fees. As evidence of this trend, Greenwich points to endowments and foundations that expect to cut their current 14.9% allocation to a targeted 14.2% in 2003. Endowments and foundations are the largest institutional investors in hedge funds, with an estimated $47 billion committed, compared with $15 billion for corporates and just $5 billion for the public funds surveyed.

As these categories were seeing increases in allocations, fixed-income allocations dropped about a percentage point in 2003, a trend Greenwich says appears likely to continue going forward.   During the four-year period from 1999 to 2003, Greenwich notes funds’ bond holdings grew 6%.   However, in the most recent analysis, a full 9% of the institutions surveyed have plans to significantly decrease their fixed-income allocations, while only 3% expect to increase.

To obtain a copy of Greenwich Associates’ 2004 Asset Allocation Report or the 2004 Investment Management Report, contact at Jeffrey Keegan an (203) 625-5116.