U.S. institutional investors piled into international equity assets last year, as they sought incremental returns, Greenwich Associates said in a report Tuesday.

International equity assets under management at U.S. institutions increased by almost 30% over the past 12 months to more than US$620 billion, Greenwich reports. “This asset growth resulted in part from performance gains in many foreign stock markets, as well as currency appreciation,” it says. “In particular, the appreciation of the euro and some Asian currencies relative to the dollar served to inflate the value of international equity portfolios.”

“Asset growth was most pronounced in Asian equities, which grew by nearly 45%,” says Greenwich Associates consultant John Colon. “Meanwhile, U.S. institutional holdings of European and Australian shares grew by almost 30%, and Japanese equities increased by nearly 20%.”

Not all of the asset growth can be attributed to currency appreciation and market effect, however. After several years of maintaining international equity holdings of roughly 11% of overall assets under management, U.S. institutions last year increased these allocations to 13% of total assets, and Greenwich Associates research suggests these allocations will continue to grow.

“U.S. pension funds are under significant pressure to generate alpha, and there is a widespread perception among institutional investors that overseas stocks are undervalued,” says Greenwich Associates consultant John Webster. “Looking at these institutions’ expected rates of return, our research reveals an anticipated 50-60 basis-point pickup in international equities relative to U.S. stocks.”

Although U.S. institutions’ international equity holdings have grown significantly, brokerage commissions paid by these investors on foreign stock trades have not kept pace, Greenwich found. In fact, total broker commissions paid by U.S. institutions on international equity trades increased only 7% year to year, to $1.8 billion. The firm offers several explanations.

“For starters, currency appreciation does not necessarily translate into new trading business,” says Greenwich Associates consultant John Feng. “Also, commission rates on agency trades fell from Q1 2004 to Q1 2005, continuing their multi-year decline. Third, institutional investors are directing an increasing portion of their trading volume to lower-cost options like program trades and self-directed electronic trading systems. Lastly, some institutions managing assets in the U.S. will centralize their trading through London.”

Greenwich Associates’ research shows that average commission rates on European equity agency trades fell from 21 basis points in Q1 2004 to 19 bps in Q1 2005. Commission rates were also on the decline in Japanese equities, which fell from 19 bps to 18 bps, and throughout Asia. Rates on trades for Hong Kong shares fell from 29 bps 12 months ago to 24 bps in 2005. At the same time, average rates dropped from 35 bps to 29 bps on Taiwanese shares and from 34 bps to 32 bps on Korean equities.

It also found that those U.S. institutions trading international equities are spending more of their brokerage commissions on obtaining best execution and less on sell-side research. And institutional investors are increasing the amount of commission dollars spent on non-traditional research services like the facilitation of face-to-face meetings with corporate management.