Public, Private Funds Grow "Together"

October 25, 2002 ( - Public defined benefit funds grew almost twice as fast as corporate funds over the last two decades, and the traditional differences in asset allocation approaches all but disappeared, according to a just-released study from Goldman Sachs Asset Management.

The study, by Tom Healey, a Goldman advisory director and a senior fellow at Harvard’s Kennedy School of Government, and Rossen Rozsenov, also of the Kennedy School, found that assets soared 800% in that two-decade period since 1980, from $393 billion to $3.6 trillion, but grew more slowly in the past decade.   Asset allocation to stocks jumped to 57% from just over 40%, while bonds dropped during the same period from 38% to 31%, and cash decreased by eight percentage points.

Meanwhile, the share of international equities surged by more than 13% to $238 billion, compared to a less than 4% increase in domestic equities.

International Interests

Indeed, the most dramatic change in the past 20 years according to the study is the growth of interest in international equity. For example, while investments in international stocks and fixed income stood at a relatively modest level of $2.5 billion in 1981, a decade later they had reached $68.2 billion and, by 2001, had further climbed to $272 billion.  

The study found that not only did the absolute value of these investments increase, but the share of international securities in pension fund portfolios also increased dramatically.   Virtually all of the top 200 pension funds studied had investments in international stocks and bonds by 2001, with an average allocation of about 14%.

Public, Private Converge

Contributing to those trends was one of the most dramatic changes in pension fund investments over the past 20 years: the disappearance of the difference in asset allocation between corporate and public funds, according to the report.   In 1981, and even 10 years later, more risk-averse public funds were very much geared to fixed income instruments, while corporate funds leaned heavily toward stocks. However, by 2001, both types of funds had virtually identical, equity-heavy asset allocations.   However, the study found that public fund portfolios have less international equity investments than do corporate funds.

Another dynamic trend was the increase in the use of indexed funds by the pension funds, which rose from 3% to 25% of total assets during the twenty-year period.   The study notes that indexed fund assets in these pension funds, which totaled $13.8 billion in 1981 (roughly half of that in a single program, that at AT&T), had risen to $277 billion in 1991 and had surged to $732 billion in 2001.   In 2001, 130 of the top 200 defined benefit plans had investments in indexed funds, including:

  • New York State Common ($79 billion),
  • California State Teachers ($66 billion),
  • CalPERS ($63 billion),
  • New York State Teachers ($37 billion), and
  • Florida State Board ($36 billion).


The study’s authors noted that the ten largest investors in indexed equity and bonds are all public funds, and that, among the five leaders of that group, the share of indexed funds as part of total assets ranges from 74% (NY State Common) to 40% (Florida State Board).

In 2001, 82% of the indexed funds of the top 200 defined benefit plans were in stocks, with only 18% in bonds.


Another pension fund trend is the relative decline of internally managed assets.   While in 1981, half of pension funds assets were managed in-house (and 41% of the top 200), by 2001 the absolute volume of assets managed internally had increased to $931.3 billion, but declined to 32% of the total top 200.

A Look Ahead

Looking ahead to the next 20 years, the study speculates that:

  • Pension asset growth will continue, but more moderately, as more beneficiaries retire and virtually no new defined benefit plans are created.
  • Over the near term, the most noticeable event may be the substantial cash requirements to fund both state and corporate pension plans stemming from three years of equity market losses, steadily increasing cash outflows to beneficiaries, and declining interest rates that have ballooned liabilities.
  • International equity allocations averaging 14% are being questioned in view of poor performance over the past decade and an increased correlation with US equities.
  • Indexation, which has increased at a 0.5% percent point per year rate over the last decade, is likely to continue at that pace.

The study’s authors close by suggesting that the most significant change in the years ahead may be an increase in new, uncorrelated asset classes such as absolute return funds and sub-asset classes such as timber and energy – “defensive” asset classes that may be very appealing in a lower return, higher volatility environment.