US funds favour global equities allocations

The home country bias of US public pension plans is diminishing, with the average allocation to US equities, falling from 42.3 per cent to 38.1 per cent from 2003 to 2008.

In that same time period the asset allocation to international equities has increased by 5.9 per cent to an average of 18.8 per cent, according to research by Wilshire Associates.

Managing director at Wilshire Associates, Steve Foresti, who directs the investment research at the firm, said the trend towards a global opportunity set for US public pension plans was a positive move.

“Each plan should use the global equities opportunity set as its starting point, and then be able to clearly articulate why its allocation is different from that opportunity set,” he said. “There are valid reasons why the plan’s investment may not look like the global opportunity set but you must know why you’re doing it.”

He said a larger number of Wilshire clients were looking at a 50:50 allocations to equities.

“I will be shocked if the trend to international equities doesn’t continue,” he said.

Wilshire surveys 125 state funds for its annual March report, which showed that funding levels for the median fund had fallen from 96 to 84 per cent.

However only about 59 of those plans had figures to the end of June 2008, so Foresti said the worst is yet to come in terms of reflecting the most recent losses.

The report showed total pension assets of these funds was $803.6 trillion and total liabilities was $1,040.6 trillion.

“Defined benefit plans are very complex structures. Actuarial statements are useful but they are backward looking, you need to look forward to acertain a plan’s health,” Foresti advised.

“You can say now when there are difficult times you have too much allocated to equities, but your role as plan sponsor is to find something in the future,” he said. “One of the lessons recently has been a painful understanding of what plan sponsor’s own risk tolerance is, and it may change behaviour and asset allocation in the future.”

Asset allocation of US public funds

Asset class 2003  2008 change %

US equities  42.3  38.1  -4.2

Non US equities 12.9  18.8  5.9

US bonds  35.2  26.7  -8.5

Non US bonds  1.4  0.9  -0.5

Real estate  4.0  5.9  1.9

Private equity  4.2 5.6  1.4

Other  4.0  4.0

Source: Wilshire Associates