No place like home?

• Author: Swaim, Lloyd
• Position: Domestic versus international investment

These days, plenty of pension plans are stepping up their overseas investments. Gillette's treasurer says, "Don't bother." But two investment advisers claim plan sponsors can't afford to stay away.

CON

GILLETTE'S DOMESTIC BENT

by Lloyd Swaim Vice president and treasurer The Gillette Co. Boston (617) 421-7756

While many studies suggest retirement and 401(k) plan sponsors are increasingly interested in international investment, some of us remain unconvinced that overseas markets necessarily bring enhanced returns. The rush to embrace international assets may be partially attributable to pension-management executives who focus only on investing assets without considering the overall business context of the enterprise sponsoring the pension plans. At The Gillette Co., we recently decided against international investments for our U.S. retirement plan. At the same time, however, we did decide to offer international investment options for employees under our 401(k) plan.

Our analyses for our retirement plan showed the return from international investments is significantly affected by currency movement against the U.S. dollar. The liability of our U.S. pension plan is in U.S. dollars, so why mismatch the assets and liabilities? In our business activities, we carefully watch our exposure to currency movement, and we saw no reason not to follow the same strategy in managing our U.S. pension assets.

We also considered the relationship of currency movement to our overall business. With more than 70 percent of our sales and earnings outside the United States, this is an important question for Gillette. Generally, the dollar strengthens when interest-rate differentials between the U.S. and international markets move in favor of the dollar. A strengthening dollar hurts the translation of our international results, but higher U.S. interest rates also suggest higher inflation, so this currency shortfall may be offset by higher pricing in the United States. When the dollar strengthens, the currency component of returns from international investment funds would generally cause a lag vis-a-vis U.S. investment fund returns and so could compound our business problem.

In the converse case, if the dollar is weakening, it means relatively higher interest rates and inflation rates abroad. While the currency component of international investment returns should then be superior to U.S. investment returns, it's not as important in our total profit picture, because our...