Domestic equity indexed assets jumped 22% to $333.285 billion during the six months ended May 31, Pensions & Investments' update of leading index fund managers shows.
Most of the growth was due to returns, rather than to increased use of stock indexing. During the period the Standard & Poor's 500 Stock Index jumped 19.23%. When adjusted for market growth, new equity indexed assets accounted for a more modest 2.6%.
With the growth in domestic equity assets - which make up 65% of the indexed assets reported - total institutional tax-exempt indexed assets grew to an all-time high of $513.267 billion. When adjusted for the S&P and 11.57% growth in the Salomon Broad Bond Index, institutional indexed assets grew a less spectacular 6.4%, or $52 billion in six months.
Ron Peyton, president of Callan Associates, San Francisco, isn't surprised by the growth. "Index funds are an institutional method of handling large sums of core money and a cost effective way to handle basic markets," he said.
Wells Fargo Nikko Investment Advisors Inc., San Francisco, accounts for almost a third of the assets in this survey - or $166.929 billion. During the six months ended May 31, the firm gained $9.4 billion in news business from both new and existing clients, said Patricia Dunn, chief executive officer. New money went into a variety of index funds, including emerging markets, tilt funds, S&P 500, international asset allocation and bond funds, she said.
Wells Fargo Nikko also is one of the big index fund managers that will have to adjust to new ownership.
The firm was purchased in June by Barclays PLC, London, in a deal that will close at the end of the year.
BZW, Barclays' quant subsidiary, manages about $50 billion in index assets for U.K. defined benefit plans, most of that in equities. The big effort over the next several months will be to bring Wells' already established European business together with BZW, said Ms. Dunn.
For its U.S. clients, the new arrangement will increase Wells' ability to support current and future needs for global investment, said Ms. Dunn. It will allow for more products, economies of scale and more crossing opportunities. U.S. clients are increasingly global in their outlook, she added.
How the change in ownership will affect indexed asset management at ANB Investment Management, Chicago, and NBD Investment Management, Detroit, is less clear. In July NBD Bancorp, Detroit, announced its merger with First Chicago Corp., parent of ANB. The merger's effect on investment management overall and indexed management specifically won't be worked out until after the deal is completed early next year, officials at both companies said.
ANB has $15.644 billion in indexed assets. NBD, primarily an active manager, does manage $502 million in equity indexed assets for institutional tax-exempt clients.
Meanwhile, the strength of the U.S. stock market also moved tactical asset allocation managers like Mellon Capital Management, San Francisco, and Avatar Associates Investment Counsel Inc., New York, into stronger positions from previous surveys when they held more bonds or cash. Mellon Capital's TAA model is value-based and Avatar's is interest rate sensitive.
Domestic bond assets reached $118.777 billion, 19% higher than the previous reporting for Dec. 1. A portion of the increase can be accounted for in the addition of $9.329 billion from State Street Global Advisors, Boston, to the survey.
State Street Global's fixed-income assets are in enhanced index funds.The traditional definition of passive vs. active management seems to blur as indexes take on enhancements.
Enhanced indexes are a growing portion of the index assets being offered by investment managers. For the 54 managers in this survey, 31 reported managing enhanced index assets. Those assets, $98.9 billion, account for 19% of the index assets reported. Two years, ago, $75.8 billion was in enhanced indexed assets.
Wells Fargo Nikko leads in enhanced assets, with $21.962 billion, followed by Fidelity Investments, Boston, with $11.069 billion and State Street Global, with $10.75 billion. Both Ryan Labs Inc., New York, with $7.5 billion in fixed-income assets, and INTECH, Palm Beach Gardens, Fla. (new to this survey), with $3.577 billion in equity assets, report all indexed assets as enhanced.
Other managers who report most of their assets as enhanced include Dimensional Fund Advisors Inc., Santa Monica, Calif., with $7.665 billion in enhanced index assets; Lincoln Capital Management Co., Chicago, $6.474 billion in enhanced; and Pacific Investment Management Co., Newport Beach, Calif., with $5.596 in enhanced.
Though international markets did not fare as well as the U.S. market, institutional investors increased allocations to international equity and bond indexing.
The Morgan Stanley Capital International Europe Australasia Far East Index dropped 1.17% during the six months ended May 31, but international equity index assets grew 6.1% to $59.5 billion from $55.74 billion Dec. 1.
International bonds showed the biggest gains. While the Salomon World Government Bond Index grew 19.49%, assets grew another 33% to $2.038 billion
Also, indexed assets managed for defined contribution plans are growing.
Among managers able to break out their assets by type of pension plan, defined contribution indexed assets grew to $53.894 billion as of May 1, up 40% from a year ago.
Most defined contribution plans use basic core type indexes like the S&P 500, Callan's Mr. Peyton said. So they've benefited from the boom in large-capitalization stocks.