Overall indexed assets managed for institutional tax-exempt clients reported to Pensions & Investments in its survey of leading index fund managers slid 0.3% in the six months ended May 31.
The 56 index fund managers reported assets of $455.514 billion, down from $456.943 billion reported on Dec. 1, 1993. Adjusted for market moves, the assets dropped 1.4%.
Equity index assets, which comprise 65% of the assets reported, took the hit, dropping 5% when adjusted for the 0.2% gain by the Standard & Poor's 500 Stock Index for the period. Assets dropped to $296.718 billion from $312.131 billion.
Although overall equity index assets fell, individual managers such as State Street Global Advisors, Boston; Pacific Investment Management Co., Newport Beach, Calif.; and Wilshire Asset Management, Santa Monica, Calif., did gain equity assets during the six months.
At Wilshire, Michael Napoli Jr., vice president and director of marketing, said there continues to be a steadily growing interest in the firm's style index products. As fund sponsors become more knowledgeable and some become disappointed with their active managers, they are taking a closer look at style indexes, he said.
While index equity assets dropped, overall domestic bond index assets grew 4.5% to $98.822 billion. When adjusted for the -3% return of Salomon Broad Bond Index, growth was an even stronger 7.7%.
For some managers like Mellon Capital Management, San Francisco, who use index funds in their tactical asset allocation strategy, the drop in equity assets resulted as the firm's value-based model shifted to domestic bonds. On May 31, Mellon's equity index assets were down to $24.581 billion from $28.479 Dec. 1, while bond index assets grew to $5.723 billion from $3.372 billion, for the same periods.
Another TAA manager, Avatar Associates, New York, reported that on May 31, of the $1.1 billion the firm has allocated to index funds, only $388 million was in equity or fixed-income indexes, the rest was in cash equivalents. Its equity/cash TAA accounts were 70% cash, and its equity/bonds/cash accounts had 52% in cash.
Wells Fargo Nikko Investment Advisors, San Francisco, topped all managers with $148.773 billion under management in index assets. Although the firm's domestic equity index assets dropped 6.5% to $91.254 from $97.641 billion, its domestic bond index assets jumped 24% to $38.190 billion from $30.778 billion.
International equity markets sparkled compared to domestic equity markets during the six months. For the period, the Morgan Stanley Capital International Europe Australasia Far East Index gained 15.16%. Index managers gained 18.86% in assets, or a market-adjusted 3.7%.
International index equity assets managed by Alliance Capital Management L.P., New York, more than doubled, to $1.002 billion from $472 million. Bankers Trust Co., New York, saw its international equity indexed assets grow 61% to $7.285 billion; State Street Global Advisors, Boston, had a 27.5% gain to $19.086 billion; Mellon Capital, saw a 17% gain to $1.585 billion; and PanAgora Asset Management, Boston, gained 15.9% to $1.684 billion.
According to Peter Leahy, vice president and portfolio manager in State Street's international passive group, there have been increased allocations from the firm's current clients, and new accounts, several won at the end of 1993, are now being funded.
The kind of index funds offered by State Street has changed significantly since 1978, when it offered its first international index fund. By the end of March, less than $2 billion of the assets were in MSCI EAFE indexes. Mr. Leahy cites the increased interest in emerging markets, the use of country selection by clients in implementing passive strategies, and custom weightings - particularly in the case of Japan - as among the many customized passive strategies sought by institutional investors.
International bond index funds grew 19.6% to $1.331 billion from $1.113 billion, or a market-adjusted 19.5%.
In P&I's previous survey, only three managers reported assets for international indexed bonds. For the six months ending May 31, the addition of PanAgora, with $310 million, and Fidelity Investments, Boston, with $96 million, account for the sharp growth in this asset class.
The Salomon World Government Bond Index grew a modest 0.08% during the six months ended May 31.
Looking to the future for index fund managers, particularly as an investment option for defined contribution plan participants, for the first time P&I also asked index managers to break out their institutional tax-exempt assets into those managed for defined benefit plans and defined contribution plans, and how the defined contribution assets were allocated.
Among the 34 managers who answered this portion of the survey, 19 firms reported that they had $38.617 in indexed assets under management for defined contribution plans.
Of those managing index assets for dc plans, Wells Fargo Nikko led with $19.143 billion, followed by The Vanguard Group, Valley Forge, Pa., with $4.638; Mellon Capital with $4.457; billion and State Street Global with $4.161 billion. The aggregate asset mix for defined contribution index assets was 75% equities, 22% bonds and 3% in international equities.