In the face of a marked increase in market volatility in the second half of 2000, growth of indexed assets slowed during the six-month period ended Dec. 31, according to Pensions & Investments' biannual survey of leading index fund managers of U.S. institutional tax-exempt assets.
Investors continued to favor equity indexing, both domestic and international, while indexed bond assets dropped in spite of generally positive returns for domestic bonds.
This year marks the 30th anniversary of the first index fund, created by Wells Fargo Bank in July 1971. It was a simple Standard & Poor's 500 stock index fund, with initial funding of $6 million from the Samsonite Co. pension fund. San Francisco-based Barclays Global Investors, the firm that subsequently absorbed Wells Fargo's investment arm, continues to sit at the top of the indexing heap with nearly $782 billion under management worldwide. Today BGI tracks more than 200 indexes around the world.
Barclays is followed by State Street Global Advisors, Boston, with $395 billion in worldwide index assets; the Vanguard Group, Valley Forge, Pa., with $237 billion; Deutsche Asset Management, New York, with $145 billion; and the Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, with $100 billion. These five managers handle more than 70% of total worldwide indexed assets under management, according to the survey.
Total worldwide index assets of these managers essentially were flat during the last half of 2000 at $2.3 trillion, increasing just 1% from the previous six-month period. Domestic indexed equity assets represent 66% of the total, or $1.6 trillion, increasing by a market-adjusted 12% during the period. This increase occurred during one of the worst periods on record for domestic equities and followed several years of double-digit gains. The S&P 500 was down 8.7% for the six months. Worldwide domestic indexed fixed-income assets, at $277.5 billion, decreased a market-adjusted 15%. The Salomon Broad Investment Grade bond index returned 7.4% for the period.
International indexed equity assets grew a healthy market-adjusted 21% during the six months to $458 billion, even as the Morgan Stanley Capital International Europe Australasia Far East index dipped 10.4%. International indexed fixed-income assets, at $139 billion, fell by a whopping 68%, adjusted for the market. The J.P. Morgan Non-U.S. Government Bond index fell 0.6% for the same period.
The $1.4 trillion in U.S. institutional tax-exempt index assets as of Dec. 31 represented about 61% of the total worldwide index assets under management; that's a decrease of 10% from six months earlier.
On a market-adjusted basis, domestic indexed equity U.S. tax-exempt institutional assets, at $1 trillion, fell 2% from the previous six months; and domestic indexed fixed income, at $227.7 billion, fell 19% for the same period.
Bonds were a tough market in 2000 and gains were sector specific, according to Lou Gehring, senior vice president and BondEdge product manager at Capital Management Sciences, Los Angeles.
International indexed equity, accounting for $164.9 billion in U.S. institutional tax-exempt assets under management, increased a market-adjusted 6.6% from six months earlier.
While growth took a breather in the wake of a market downturn and amid signs of economic slowdown, indexing continues to provide an attractive low-cost core strategy in many institutional portfolios.
"Indexing demand may be leveling off right now," said Louis Finney, investment consultant at William M. Mercer Inc., Chicago. "Active management gained a little momentum last year. You had a run from 1994-1998 when large-cap growth was the place to be and indexing beat the median active manager. For the last 18 months, the pendulum has swung the other way and the median active manager has looked better." But, he said, investors should be cautious about saying active management will outperform the indexes over the long term, a dubious prospect at best.
As indexed strategies become a larger part of the overall market, index managers are becoming more sensitive about communicating to their clients more information about how index funds function.
"We try to educate our clients and give them as much information as possible," said Peter Landin, managing director at BGI. "We want to make the information transparent about such things as expenses. We run things at a low expense ratio and try to educate our clients to pay attention to how expenses affect returns."
Index fund managers always have paid careful attention to costs and trading efficiencies, said Peter Leahy, head of global structured products at State Street.
Clients also are becoming more specific in how they use index funds in the context of their overall portfolios, he said. The use of indexing as a core position "may be slowing a bit," while other techniques such as the active use of indexes in the portfolio are "taking off."
Reversing a trend that started last year, enhanced indexing lost ground during the second half of 2000, declining by 29% overall to $274 billion (after having gained more than 6% in the previous six-month period). Enhanced domestic equity assets fell a market-adjusted 9%, after having grown at the fastest rate of all domestic equity categories during the first six months of 2000. The story is similar for enhanced non-U.S. equity indexing, which fell by a market-adjusted 36%. Enhanced indexed bond assets declined 22% on a market-adjusted basis.
While total U.S.-based indexed assets were down 7% during the second half of 2000, indexed equities experienced slight gains. Domestic U.S.-based indexed equity assets increased 3%, on a market-adjusted basis, from the previous six-month period, while indexed U.S.-based international equity assets gained a market-adjusted 4%. Total U.S.-based domestic fixed-income indexed assets fell 19% when adjusted for the market, and international fixed-income assets rose 122%.
U.S.-based indexed assets in mutual funds managed by the leading index fund managers dropped 3% to $392 billion during the six months ended Dec. 31. Domestic equity indexed assets increased by 6.4%, adjusted for the market, continuing a longstanding trend. International indexed equity assets increased 14%.