Domestic equity indexing was virtually flat for the year and the six months ended Dec. 1 on a market-adjusted basis, growing 0.8% and 0.4% , respectively.
Meanwhile, international indexed equity grew 3.5% when adjusted for the market. Domestic bonds were up 4.8% and international bond indexed assets were up a strong 39.5%.
Overall, institutional tax-exempt indexed assets rose almost 29% in the year ended Dec. 1, to $828.4 billion.
Looking at the total numbers, it would seem plan sponsors are showing unbridled enthusiasm for indexing. But the growth is largely the result of another great year for the U.S. stock market, with the Standard & Poor's 500 Stock Index gaining 27.86%.
When adjusted for market growth, total U.S. institutional tax-exempt indexed assets managed by the leading index fund managers grew 6.3% for the year.For the six months they grew only 1.7%, compared with 3.6% the previous six months.
Domestic indexed equities - mostly in S&P index funds - make up more than two-thirds of the total indexed assets in Pensions & Investments' survey.
Domestic equity indexed assets were virtually flat in the six months, growing to $565.605 billion. International indexed equity grew to $99.9 billion.
Growth in domestic indexed bond assets outpaced both domestic and international indexed equity, up a market-adjusted 4.8% to $161.002 billion. The Salomon Broad Bond Index returned 7.2% for the period.
International indexed bonds were up 39.5%, to $1.89 billion, still well below the high of $2.22 billion as of Dec. 1, 1995. International indexed bonds are the smallest asset class in the survey.
TIAA-CREF was not included in the leading index fund managers survey in 1995. In order to compare total institutional tax-exempt indexed assets for Dec. 1, 1996, with the previous year, asset totals were adjusted.
This year's slowdown in indexed asset growth does not mean plan sponsors are less interested in indexing. "Tactically it's a good place to be," said Richard M. Ennis, principal with Ennis, Knupp and Associates. The Chicago-based consulting firm is an advocate of indexing and Mr. Ennis said its clients are a little different from most consulting firms. A typical Ennis, Knupp client would have 40% to 50% of equities indexed, 30% of bonds and 30% of international equity assets. There is gradual "disaffection with active managers," said Mr. Ennis, and plan sponsors are not reducing their index assets.
Mr. Ennis pointed out that in P&I's recent survey of the top 200 pension funds (P&I, Jan. 20), indexed assets as a percentage of total assets in defined benefit plans increased in 1996 to 24%, from just less than 20% the previous year. He also noted in that survey indexed bond assets nearly doubled from the previous year.
Mr. Ennis attributes the leveling off of domestic equity indexing and the shift to domestic indexed bonds at least in part to rebalancing. A lot of plan sponsors have a principal indexer, who offers index products across markets. Rebalancing internally can be done easily and sometimes at little or no cost, Mr. Ennis said.
Boston-based State Street Global Advisors' domestic index bond assets were up 14.8% to $16.111 billion for the six-month period. J. Victor Thompson, head of U.S. fixed income, agreed some of the growth might be the result of rebalancing portfolios that have grown beyond target allocations.
But he added the primary driver behind indexed fixed income is active managers' poor performance, lack of compliance and lack of stability due to changes in ownership.
The Vanguard Group also saw strong growth in indexed bond assets in the six months, up 26% to $2.008 billion. The bond area is up overall, said Jeff Molitor, principal and director of portfolio review at the Valley Forge, Pa., firm.
Mr. Molitor said it is hard to say what is driving the growth in indexed bonds, and speculated funds were reallocating back to their baseline, "not leaving their winnings on the table."
Vanguard's equity indexed funds, virtually all in mutual funds, jumped 68% in the six months ended Dec. 1. Mr. Molitor said the assets moving into Vanguard's domestic index equity funds are from 401(k) clients, particularly full-service clients that have an index fund for a core position, and from small defined benefit plans and endowments and foundations. He said endowments are using the index funds as a core position and "spicing it up around the edges" with alternative investments.
The S&P 500 index funds makes up most, but not all of the indexed equity. The Wilshire 5000 covers a much broader market, but the S&P is better known. And, Mr. Molitor said,"some investors are chasing performance."
Although S&P 500 index funds tend to draw the most dollars, it's not being singled out by plan sponsors seeking broad market exposure, said Arlene Rockefeller, principal and head of U.S. structured products at State Street Global Advisors. Stocks in the S&P 500 are included in broader market indexes. Plan sponsors also are using style indexes to fill in the gaps of their active manager lineups.
Although growth in international index assets slowed over the six months, Mr. Ennis sees considerable growth going forward. One reason is that active managers - whose costs are higher - don't beat the index.
Mr. Ennis explained there also have been some changes in the indexes themselves, with a significant reduction in the weighting of Japan, a concern of many indexers using the MSCI EAFE in the past several years. Plan sponsors also can use emerging markets indexes, he said, to enhance international returns and further lower exposure to Japan.
"It's better diversification at a lower cost," said Mr. Ennis. He added there also is less concern about currency risk than a few years ago.
About 17% of the assets reported in P&I's survey of leading index fund managers is in enhanced indexed products. Those assets continue a steady growth, up 14% to $142.714 billion for the six months ended Dec. 1. The listing includes both domestic and international equity and domestic bond indexes that use a variety of strategies to enhance the returns on a benchmark index.
For this survey, managers of enhanced indexed equity assets were asked to describe briefly the strategies they employ to enhance the benchmark. The most common tactics by the 25 managers are derivative-based strategies and stock selection. Managers also used strategies they described as mathematical, risk optimization, tax arbitrage and quantitative.
Representative returns reported by managers for domestic enhanced indexed strategies for the year ended Dec. 1 ranged from 28.2% to 21.4%, compared with the S&P return of 27.9%.
About two-thirds of State Street Global's $16.111 billion in indexed bon