LETTERS
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Some alternative strategies struggle in first quarter following tough 2020
      Close up of Business people shaking hands, finishing up meeting, business etiquette, congratulation, merger and acquisition concept
      Cathay Innovation Partners takes minority stake in Seaya Ventures
      IACPM: Credit managers see stabilizing effect from stimulus programs
      KKR lifts out 3 to focus on clean energy infrastructure
    • Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
      Hub International agrees to buy Plan Sponsor Consultants
      Aon names public markets solution leader
    • The J.P. Morgan Chase logo displayed at a branch bank
      J.P. Morgan sells $13 billion of bonds in largest-ever bank deal
      John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      IACPM: Credit managers see stabilizing effect from stimulus programs
      BofA: Most managers bullish on economy, markets
    • Pentegra launches pooled employer plan
      Teresa Hassara
      Ascensus taps MassMutual alum as new FuturePlan president
      Economic Group Pension Services scoops up third-party administrator
      OregonSaves gathers $100 million in assets
    • WTW to cut carbon footprint of OCIO portfolios by half by 2030
      SEC Commissioners Testify Before The House Financial Services Committee
      SEC shouldn’t require ESG metrics – commissioner
      Tracker gives investors insight into progress on social commitments
      Shoppers wear protective masks while visiting an Apple Inc. store at George Street in Sydney, Australia, on June 24, 2020.
      Apple backs SEC mandate on climate disclosure
    • New book culls institutional wisdom from podcast series
      Fearless Girl
      SSGA’s Fearless Girl statue now shattering glass ceiling
      Tangen video
      Norges chief dons chef’s hat to boost employees’ spirits
      Ken Griffin
      Ken Griffin donates $5 million to give Miami students internet
    • Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
      Jason Kephart
      Managers see good times ahead in 2021
      Jev Mehmet, CEO of Brevan Howard's Coremont unit
      Brevan Howard runs $50 billion unit like BlackRock’s Aladdin
    • University of New Hampshire endowment allocates $14 million
      Sen. Elizabeth Warren, D-Mass., listens during a Senate Health, Education, Labor, and Pensions confirmation hearing for Marty Walsh, secretary of labor nominee for President Joe Biden, in Washington on Feb. 4, 2021
      Lawmakers reintroduce climate-risk disclosure bill
      The U.S. Capitol and Library of Congress stand in this aerial photograph taken above Washington
      Senate bill seeks to make U.S. climate-change leader
      Brexit pushes 440 financial services firms to move some U.K. business to Europe
    • Morgan Stanley logo
      Morgan Stanley’s record quarter stained by Archegos collapse
      Man Group CEO Luke Ellis
      Man Group AUM up in first quarter on performance
      Michael Zerda
      LaSalle picks head of debt and special situations
      Susan Ford
      Duff & Phelps brings on institutional business development managing director
    • Corporate plan funding gets a boost from higher discount rates – Milliman
      Evan Siddall
      AIMCo lines up next CEO
      A bank customer takes Danish Kroner banknotes from an ATM in Aarhus, Denmark
      Denmark’s PFA Pension achieves 6.3% return in first quarter
      Ontario Municipal promotes from within for new global equities exec
    • Tufts taps interim co-CIO as new investment chief
      Michael Zerda
      LaSalle picks head of debt and special situations
      Evan Siddall
      AIMCo lines up next CEO
      Susan Ford
      Duff & Phelps brings on institutional business development managing director
    • Paul Morrissey
      Blackstone Growth picks managing director to lead European investing
      Bills of euro, dollar and pound currencies, among others
      Ardian closes latest buyout fund at $8.8 billion
      Hand typing on stationary iPhone at an office reception desk
      Private equity’s taste for tech spurs $80 billion deal spree
      Vista Equity promotes 2 to leadership roles on 2 funds
    • CalSTRS indutrial property
      Investors hungry for industrial properties
      Tim Wang
      GLP names co-president of logistics, industrial real estate for China
      Frank Forster
      StepStone Real Estate adds managing director for Europe
      Christine Iacoucci
      BentallGreenOak promotes from within to fill Canadian CIO role
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
      Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • University of New Hampshire endowment allocates $14 million
      Memphis Light, Gas & Water scouting for special situations funds
      Washington State Investment Board earmarks $4.2 billion for 7 funds
      Virginia earmarks $1 billion for 4 managers
    • University of New Hampshire endowment allocates $14 million
      Memphis Light, Gas & Water scouting for special situations funds
      Washington State Investment Board earmarks $4.2 billion for 7 funds
      Virginia earmarks $1 billion for 4 managers
    • Passive Investment Management Services
      Active Extended Global Credit Manager Search
      Actuarial Services
      Investment Management Services
    • Private real estate funds continue rebound
      Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
      Stable value retains edge over money market funds
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
      Vaccination cartoon
      Rallying to meet the ongoing COVID-19 challenge
      Tesla cartoon
      Don’t confuse wealth creation with retirement saving
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
      Jim Park
      Commentary: Asian Americans, Pacific Islanders face ‘bamboo ceiling’ in money management
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      Fixed income 2021
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
      watch video
      0:45
      Private funds weathered 2020 turmoil
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
    • POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Private real estate funds continue rebound
      Managed account adoption stalls in 2020
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Understanding the PEP Evolution
      Divest or engage?
      Innovations in DC: Helping supercharge retirement outcomes
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Print
September 16, 1996 01:00 AM

LETTERS

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Enhanced indexing works

    Our firm has been following separate account enhanced index strategies since 1991, when very few managers offered such accounts. Our most recent review found about 50 managers and strategies (some with live track records going back to the early '80s) which purport to be enhanced indexed. Contrary to the results attributed to Ibbotson Associates in the Aug. 5 article "Enhanced indexing rapped," we are familiar with some genuine enhanced indexers who have consistently added 1% to 1.4% (gross) in annual excess returns with 2% annual tracking errors. (Of course, some enhanced index firms do better and some do worse.)

    We consider only those strategies which either: pick stocks but use an optimizer to construct portfolios that take limited controlled bets against the benchmark; buy stock index futures and manage short bonds with duration, sector, quality bets; use a combination of futures plus various risk limited arbitrage strategies to produce enhanced cash returns; or used constrained growth rate maximization (for stocks). We do not included swap or long-short strategies. Not only have we found that enhanced indexing generally reduces the likelihood of taking big, poorly understood bets, but performance is repeatable over three- to five-year periods, and the processes can survive turnover within the management firm. While it is true that all these strategies involve characteristic risks, and also true that none of the risk models is complete, enhanced indexing takes fewer and smaller risks than is typical of outright active management.

    One reason that Ibbotson-managed results may differ is that some of the better enhanced index managers have not offered mutual funds. We expect that when Ibbotson looks at managed accounts instead of mutual funds, its results will be more positive.

    Alan D. Biller

    Alan D. Biller & Associates Inc.

    Palo Alto, Calif.

    Value of enhanced index

    A recent study by Ibbotson Associates, Chicago, concluded that "enhanced indexing is neither." The study, however, looks at enhanced indexing in a vacuum. The value of including a new asset class or manager in a portfolio depends not on how they perform in isolation but on how they correlate to the existing portfolio. The Ibbotson study does not compare enhanced indexers to traditional equity managers and thus fails to address a key reason and major benefit of this style of management: diversification of value-added or alpha.

    As the Ibbotson article correctly pointed out, enhanced indexing is in the eye of the beholder. There is, as yet, no generally accepted definition of enhanced indexing, which encompasses many diverse strategies described in their study. However, because any strategy that attempts to outperform a benchmark, such as the Standard & Poor's 500 Stock Index, must take risk, enhanced indexing and traditional active equity management will have similar elements.

    The correct questions, then, pertaining to the value of enhanced indexing become:

    a) is better risk management apparent among enhanced indexers when compared to traditional styles;

    b) does enhanced indexing provide superior, similar or lower returns per unit of incremental risk taken; and

    c) by combining traditional with non-traditional equity managers (such as enhanced indexers), can overall portfolio performance be enhanced?

    Our firm's preliminary empirical research into the performance of traditional equity managers vs. enhanced index approaches highlights these issues.

    To compare performance characteristics of these two styles, we first calculated the annualized average and standard deviation of their returns in excess of the S&P 500 (alpha) and found the following:

    One hundred seventy-nine traditional managers had an average annualized alpha of 0.95% with a standard deviation of 6.94%. The level of alphas ranged widely from -7.54% to 16.25%.

    Thirteen enhanced index managers had an average alpha of -0.25% but with a significantly lower standard deviation of 3.32%. The range here also was much narrower, from -5.94% to 2.91%.

    On a risk-adjusted basis (alpha divided by standard deviation of alpha), the average alpha for traditional managers was a mere 0.07% but a more significant 0.26% for enhanced indexers.

    Both sets of managers, on average, had betas with respect to the S&P 500 of 0.99 and so both on average have a risk level comparable to the S&P 500. However, the average correlation of traditional manager returns with the S&P 500 was only 0.82 compared with a higher average of 0.93 for enhancers, showing their tighter index tracking ability.

    These results would seem to indicate enhanced indexers are true to their name in offering more consistent performance and tracking their benchmarks more closely than traditional managers.

    The evidence shows virtually all of the most attractive strategies are enhanced index strategies (with one exception, which was a traditional active manager with only a few quarters of history).

    Not only have enhanced index strategies performed well on an absolute and relative basis, they have low correlation of alpha with other more traditional managers. For example, the average correlation of excess return of these more traditional managers with some enhanced index strategies was -0.14. The average standard deviation of traditional managers' alpha was 6.94% compared to 3.32% for enhanced indexers. Thus, a 50/50 mix of an enhanced index strategy and another traditional manager could, on average, cut the volatility of relative performance roughly in half.

    We found the results supportive of enhanced indexing strategies in general, contrary to the Ibbotson article. The name "enhanced indexing" may be vague and ill-defined (not unlike "market neutral" or "risk arbitrage") but it encompasses strategies worthy of consideration in any equity portfolio.

    Matthew Smith

    Lotsoff Capital Management

    Chicago

    Disappearing ETIs

    In the Others' Views article, "Disappearing ETIs, or just a new definition" (Pensions & Investments, June 10), D. Jeanne Patterson says that economically targeted investments "will now be considered alternative investments, rather than economically targeted per se." She also asks whether "alternative investments (are) taking the place of ETI" and quotes fairly extensively from the 1995 Survey of Alternative Investments by Pension Funds, Endowments and Foundations, conducted by Goldman, Sachs & Co. and Frank Russell Capital Inc.

    This conjunction of ideas could be misleading. It is important that we not confuse alternative investments with economically targeted investments. While the Goldman/Russell survey did include "targeted investments" in its definition of alternative investments, only a tiny fraction - 2.4% -of the $69 billion committed to alternative investments was specifically allocated to ETIs.

    Thomas J. Healey

    Partner

    Goldman, Sachs & Co.

    New York

    Kleinwort Benson

    Kleinwort Benson Investment Management Americas Inc. was not listed in your May 13 directory of money managers, although we have been included in past years.

    The firm is an active international and emerging markets equity manager. It has $1.2 billion under management as of March 31, of which $717 million is U.S. institutional tax exempt. It had $581 million in international equity and $136 million in emerging markets equity for U.S. institutional tax-exempt clients.

    For international equities its investment approach is bottom-up and seeks to identify undervalued growth stocks using intensive research methods.

    For emerging market equities its investment approach uses a two-tier, fixed weight, core strategy combined with integrated risk management and both top-down and bottom-up analysis.

    The parent company is Dresdner Bank.

    Peter J. Ellis is chief investment officer; Lauren R. Teel, director, is client contact at (212) 351-5800.

    Kimberly Fusaro

    Assistant vice president

    Kleinwort Benson Investment

    Management Americas Inc.

    New York

    Babson-Stewart

    In the June 24 issue of Pensions & Investments there was a ranking of the overseas managers, Babson-Stewart Ivory International was not included in the listing. Due to the wide readership of Pensions & Investments, we feel strongly about being included in this listing.

    Babson-Stewart Ivory International is a partnership between David L. Babson & Co. Inc., Cambridge, Mass., and Stewart Ivory & Co. Ltd. Edinburgh, Scotland. Babson-Stewart Ivory International has $568 million in international/global assets as of March 31 for U.S. institutional tax-exempt accounts. The firm has $437 million in international accounts and $197 million in global equity accounts.

    Mary K. Guy

    Vice President

    Babson-Stewart Ivory

    International

    Cambridge, Mass.

    Warburg PincusWarburg Pincus was not in your Aug. 5 directory of managers of defined contribution plan assets. The firm invested $1.1 billion for defined contribution pension plans as of Dec. 31; all of the assets are managed internally.

    Of the defined contribution assets, $850 million is from 401(k) plans and $250 million is from profit-sharing and money purchase plans. The assets are invested as follows: $875 million in mutual funds, $25 million in variable annuities and $200 million in separate accounts.

    The asset mix as of Jan. 1 was 90% stocks, 10% cash.

    I am the client contact and can be reached at (212) 878-5680.

    Brady T. Lipp

    Warburg Pincus

    New York

    Ezra Zask

    I would like to point out an oversight in the listing of derivatives consultants in the July 22 issue.

    My firm, Ezra Zask Associates Inc., is a leading provider of derivative consulting services to banks, corporations and pension funds.

    We are active in litigation support, training and consulting in risk management, value-at-risk consulting and training programs on derivatives in the United States and abroad. Among our credentials are:

    Ezra Zask served as the expert witness in the ABN-AMRO currency option loss of $70 million;

    EZA Inc. was retained to analyze Dell Computer Corp.'s use of currency options;

    The U.S. AID program has retained EZA to train Russian and Eastern European managers in the use of derivatives

    As a commodities trading adviser, EZA manages funds in the futures markets for institutional clients; and

    Ezra Zask is listed in the Intercapital Who's Who in Derivatives.

    In addition, we have been active in presenting VAR seminars and consulting to banks.

    We have 12 institutional clients.

    I would appreciate our firm's inclusion in any future lists of derivative consultants.

    Ezra Zask

    Ezra Zask Associates Inc.

    Norfolk, Conn.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Gender diversity is improving on FTSE 350 boards
    Gender diversity is improving on FTSE 350 boards
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    Sponsored Content: In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center