US tax-exempt assets invested in cross-border assets declined for the third consecutive year in 2002, but cross-border assets as a percentage of total US pension assets remained stable, according to the results of a new survey published by InterSec Research.
Total US tax-exempt cross-border assets dropped to $629 billion at the end of 2002, down $76 billion from the previous year. Most of the decrease was attributed to the decline in global equity markets. At year end 2002 cross-border investment accounted for 11.9% of total US pension assets, rising slightly from 11.8% a year ago.
However, InterSec is confident that cross-border investment will remain an essential asset class for US tax-exempt institutions, and predicts that total cross-border assets will surpass $1 trillion in 2007, representing 12.7% of total US pension assets.
For the first time in many years, there was a net withdrawal of $7 billion from cross-border investments. After years of underperformance, the MSCI EAFE index outperformed the S&P 500 in 2002. As a result, US pension plans were able to maintain their international exposure without increased funding.
Helping to bring net cash flow into negative territory, cross-border equity attracted only $27 billion initial funding in 2002, less than half of the previous year. The drop is at least partially attributed to the delay in manager replacement while many plan sponsors undertook asset-liability studies in the wake of poor overall equity returns.
“Taking into account this timing issue, the moderate outflow in 2002 does not necessarily indicate a trend of shrinking opportunity set for managers of cross-border mandates,” says Richard Qiu, Research Analyst at InterSec. Cross-border equity continued to represent the vast majority of all cross-border assets under management and cash flows.
In active international equity, the most popular mandate among US tax-exempt institutions, most of the top new business winners continued to be US-based managers. Three of the top ten had dominated the business for many years, but more noteworthy is the fact that two managers who previously had little institutional assets under management for this asset class entered the top ten list for the first time.
Among international equity managers, value managers attracted remarkable cash inflow with their superior recent performance, while growth managers suffered substantial loss of assets. In new business won by international equity managers, however, there was still a good mix of growth, value and core managers.
“More and more plans are aware of the importance of style in international investment, and are implementing style diversification in their international programs,” comments Rick Bisignano, Vice President who heads InterSec’s Performance Consultant Group.