U.S. tax-exempt indexed assets, both passive and enhanced, held steady during the second half of 2001 when adjusted for market movements, with international equity indexing showing the largest gains, according to Pensions & Investments' biannual survey of index fund managers.
Total worldwide indexed assets managed by the 60 institutional money managers surveyed also remained generally unchanged from the first half of the year on a market-adjusted basis, at $2.6 trillion as of Dec. 31 compared with $2.5 trillion on June 30.
U.S. institutional tax-exempt indexed assets rose to $1.6 trillion as of year-end from $1.5 trillion six months earlier, essentially unchanged when adjusted for market activity. Institutional assets represent about 62% of the total worldwide indexed assets managed by the leading index fund managers, according to the survey; that's down from 80% at the end of 1999.
Despite the lack of dramatic growth in indexed assets in the second half of 2001, indexing remains an attractive investment strategy for both pension plan sponsors and defined contribution plan participants.
Noting that active managers have outperformed index managers over the past year, Ron Peyton, president of Callan Associates, San Francisco, said, "indexing is just another disciplined style of investment management and certainly has a place in many portfolios. It's all in the plan design."
While there were no significant differences in most indexing categories from the first half of the year to the second half, there was some noticeable growth in the use of international equity indexes.
Despite an 8% drop in the Morgan Stanley Capital International Europe Australasia Far East index for the six months ended June 30, worldwide international equity assets managed by the leading index fund managers grew by a market adjusted 11% to $461 billion.
Institutional, tax-exempt international equity assets declined on an absolute basis to approximately $146 billion. Adjusted for the market decline, however, institutional, tax-exempt international equity assets were essentially flat during the second half of 2001, despite the 8% market decline.
There was no overpowering reason for the apparent boost in the attractiveness of international equity indexing, said Chris Ford, New York practice leader for Watson Wyatt Investment Consulting. "It's probably due to a couple of things," he said. "Larger plans recognize the cyclicality of market performance and look at it as a buying opportunity." Plan sponsors also are using international index funds as core holdings with active managers in supporting roles, he said.
Mr. Ford said there has been no noticeable increase in search activity for enhanced or passively managed index managers and that growth in any particular indexing strategy is likely the result of plan sponsors' shifting assets in their existing portfolios.
While domestic equities have dominated passive and enhanced indexing strategies for the past few years, bonds actually outperformed equities in 2001, as the equity markets were hit hard by a souring economy and earnings concerns. The Salomon Smith Barney Broad Investment Grade bond index gained 4.7% during the six months ended Dec. 31, compared with -5.6% for the Standard & Poor's 500 stock index. Still, U.S. institutional, tax-exempt indexed bond assets for the same period were down nearly 10% on a market-adjusted basis, to $371 billion, as investors continued to look to the equity market for long-term returns.
Enhanced assets slip
The significant enhanced indexing gains of previous years slowed during the second half of 2001, as total enhanced index assets slipped to $355 billion at the end of 2001 from $359 billion as of June 30. Enhanced indexing strategies are popular among "sophisticated" plan sponsors, said Russ Kamp, product manager at INVESCO Institutional, Atlanta, which saw its total enhanced index assets under management grow by nearly 25% in the second half of 2001 to $2.7 billion. INVESCO has increased the number of enhanced index fund offerings to three in the last two years, including two enhanced S&P 500 funds and one benchmarked to the Russell 1000.
Indexed mutual fund assets continued to grow as indexing among participant-directed defined contribution plans showed no signs of slowing during the six months ended Dec. 31. The biggest increase was indexed non-U.S equity mutual funds, which gained 29% (changed)on a market-adjusted basis, to just over $20 billion, while domestic equity indexed funds increased a market-adjusted 12%, to $328 billion, for the last six months of 2001.
Indexing benchmarks have proliferated as the number and type of index funds has grown over the years. According to P&I's survey, most leading managers of passive and enhanced indexing use more than one index to manage institutional, tax-exempt assets, and several use multiple benchmarks.
The most common is the S&P 500, with an average 73% of assets indexed against the large-cap index. After the S&P 500, the next-most-used equity indexes were the Russell 3000 index, with 16% of assets; the Russell 2000 Value index, 11%; Russell 1000, 9.6%; S&P Small Cap, 8%; S&P 500 Growth, 8%; Wilshire 5000, 6.5%; Russell 1000 Value, 6.3%; S&P Mid Cap, 5.5%; Russell 2000, 4%; Russell 1000 Growth, 3.7%; Wilshire 4500, 2.7%; Russell 2000 Growth, 1%; and other indexes, 11%.
Top five constant
The top five leading index fund managers have remained relatively constant over the past two years. Barclays Global Investors, San Francisco, held its position as the largest with $451 billion in U.S. institutional tax-exempt indexed assets under management as of Dec. 31.
BGI is followed by State Street Global Advisors, Boston, with $415 billion; Vanguard Group, Valley Forge, Pa., $94 billion; TIAA-CREF, New York, $83 billion; and Deutsche Asset Management, New York, with $65 billion. These five managers account for 69% of the total institutional tax-exempt assets managed by the leading index fund managers.
The most recent survey results show SSgA pulling slightly ahead of arch-rival BGI in passive institutional tax-exempt index assets under management, with $404 billion vs. BGI's $391 billion. Barclays retains the overall bragging rights and indexing lead, however, with $768 billion in total worldwide index assets under management vs. SSgA's $641 billion.
Due to a change in methodology, Goldman Sachs Asset Management, New York, reported almost $8 billion more in U.S. institutional tax-exempt indexed assets as of Dec. 31 than it had six months earlier.