The $13.4 billion Iowa Public Employees' Retirement System is the first pension fund to publicly choose the new Lehman Universal Bond index as its fixed-income benchmark.
Iowa PERS, Des Moines, is using the Lehman Universal for a $1.1 billion portfolio managed by J.P. Morgan Investment Management Inc., New York.
Iowa fund officials switched J.P. Morgan to the Universal index when they expanded the money manager's mandate to a global opportunistic one from straight domestic, said T. J. Carlson, the fund's investment officer.
Lehman's Universal includes high-yield and emerging market debt; previously, J.P. Morgan's benchmark was the Lehman Aggregate.
The changes involving Morgan were part of broader fixed-income moves that reduced Iowa's duration risk exposure and gave it more freedom to invest outside the United States, said Mr. Carlson.
"In order to accomplish this, IPERS terminated two global mandate managers and IPERS' long-duration manager in favor of increasing the opportunity set of our domestic investment managers," he said.
In addition, J.P. Morgan is interim manager for a portion of the assets from the terminated managers, Mr. Carlson said. Iowa fund officials plan to hire additional fixed-income manager "to run a U.S. Universal mandate of similar size," Mr. Carlson said.
John Snyder, a vice president in the fixed-income division of J.P. Morgan Investment Management, said the Lehman Universal is an example of a benchmark "catching up with the reality of the industry." Most fixed-income managers long have invested in emerging markets and high-yield debt, he said.
But not all fixed-income specialists think the new index will be that important.
Brent R. Harris, a managing director of Pacific Investment Management Co., Newport Beach, Calif., said he doesn't think many clients "are all there yet," in terms of having both high-yield and emerging-market debt in their fixed-income portfolios.
He also said allocations to high yield, which makes up 5% of the index, and emerging markets, 3.5%, are too high and that most pension plans don't have such large allocations to these asset classes.
J.P. Morgan's Mr. Snyder said the 8.5% allocation is higher than that of about half of his clients.
Steve Berkley, managing director and head of the global fixed-income index business at Lehman Brothers, said one reason for the new index is "sophisticated investors wanted tougher hurdles that would differentiate them from other investors."
Billions of dollars are already run against the new benchmark, he said. A corporate pension fund, which he declined to name, is running a $14 billion fixed-income portfolio against it, he claimed.
Said Steve Voss, an associate with consultant Ennis Knupp & Associates, Chicago: "Many clients have been exposed to high-yield and emerging-market (debt) and we think it's a natural progression to use the new benchmark."