Total worldwide index strategies continued last year's solid growth during the first six months of 2003, spearheaded by significant increases in both domestic and non-U.S. equity index assets, according to Pensions & Investments' twice-annual survey of index managers.
For the 56 institutional money managers who participated in the survey, worldwide indexed assets under management climbed to $2.8 trillion as of June 30, an increase of 16.6% from the $2.4 trillion in worldwide index strategies reported for the end of 2002 (P&I, March 17). U.S. equity indexed assets made up $1.5 trillion, or 54%, of all worldwide indexed assets.
U.S. institutional tax-exempt indexed assets came in at $1.59 trillion as of June 30, climbing from $1.42 trillion as of Dec. 31.
On a market-adjusted basis, the worldwide assets increased 5.4%; and the U.S. institutional tax-exempt assets increased 2.6%. During the six months, the Standard & Poor's 500 stock index returned 11.8%; the Citigroup Broad Investment Grade Bond index returned 4%; the Morgan Stanley Capital International Europe Australasia Far East index, 9.9%; and the J.P. Morgan Non-U.S. Government Bond index, 8.1%.
The survey showed U.S. institutional tax-exempt index equity assets climbed to $979.2 billion as of June 30, from $853.4 billion at the end of 2002, an overall increase of 14.7%. Domestic institutional tax-exempt fixed-income assets grew at a slower rate, climbing to $455.9 billion as of June 30 from $424.5 billion at the end of 2002, an increase of 7.3%. U.S. institutional tax-exempt assets managed in non-U.S. equity indexes climbed to $151.2 billion, from $101.5 billion at the end of 2002, in large part due to a money manager's incorrect entry in P&I's previous survey.
Louis Finney, a senior consultant at Mercer Investment Consulting, Chicago, isn't surprised by the growth trend in the indexing world. "If people are feeling they aren't getting the value added from active management, then it makes sense that they're looking" for indexed management, said Mr. Finney. "I've had clients ask me, `If we go 100% index, how much money do we save?' "
Barclays Global Investors, San Francisco, remained at the top of the heap, with overall worldwide indexed assets under management at $887.8 billion as of June 30, from $735 billion at the end of 2002. Of the June 30 total, $480 billion was U.S. institutional tax-exempt. Enhanced worldwide index assets for BGI rose to $73.1 billion, from $60.6 billion as of Dec. 31.
According to Kathy Taylor, BGI's managing director of U.S. institutional business, plan sponsors have become more comfortable with indexing in the past several years. Sponsors are saying "we want to hit singles and doubles, not necessarily the home run because we're not Barry Bonds. We don't know which active manager will hit the home runs. Let's get the managers who are consistently hitting those singles and doubles on a quarter-by-quarter basis," she said.
Other top index managers experienced similar growth. State Street Global Advisors, Boston, came in second with $776 billion in worldwide indexed assets, a 16% increase from six months earlier. As of June 30, $411 billion was U.S. institutional tax-exempt.
Some manager turnover affected survey results. Chicago-based Northern Trust Global Investments' index business skyrocketed in the first half of this year, as the February acquisition of Deutsche Asset Management's passive and enhanced index capacities brought nearly 170 new clients into the fold. Northern Trust's worldwide indexed assets soared to $138.2 billion, from $57.5 billion as of Dec. 31. Deutsche Asset Management had $106.6 billion of worldwide indexed assets under management at the end of last year. Northern Trust's U.S. institutional tax-exempt assets rose to $129.7 billion as of June 30, from $52.6 billion.
Greystone Capital Management, Hartford, Conn., which had reported $339 million in worldwide indexed assets as of June 30, 2002, was acquired by Utendahl Capital Management Inc., New York, in December; the merged company moved those assets into Utendahl's active fixed-income strategies.
First Quadrant LP, Pasadena, Calif., which reported $722 million in institutional tax-exempt assets as of Dec. 31, reclassified them as overlay assets.
According to a recent report by the Equity Index Tracker from the Goldman, Sachs & Co. Equity Derivatives Strategy group, the introduction of exchange-traded funds - index funds that are listed and traded on exchanges like stocks - helped spur the growth in midcap and small-cap indexing, a strong trend in the past three years that has won favor with passive managers. Since the end of 1998, when the midcap and small-cap universes had indexed asset totals of $21 billion and $28 billion, respectively, both universes hovered around $50 billion in indexed assets as of Dec. 31, a growth rate for both of about 106%.
"I want to see more and more liquid ETFs out there," said Mr. Finney. "It lowers the implementation costs for clients dramatically on a number of things."
"ETFs are a great way to put your money to work in the marketplace," said Kurt Zyla, vice president and head of index management at BNY Asset Management, New York.
BNY Asset Management's U.S. institutional tax-exempt indexed assets rose to $8.5 billion as of June 30, from $6.6 billion as of Dec. 31. The firm reported $37.4 billion in worldwide indexed assets as of June 30; at year-end, BNY had reported $8.3 billion in worldwide indexed assets. The increase comes from the inclusion of exchange-traded funds, which had been omitted from the previous reports.
Mutual fund managers, meanwhile, continued to strongly prefer equity funds over fixed income in the first half of this year. Out of the $452.6 billion of indexed mutual fund assets as of June 30, $375.6 billion, or 83%, were in equity.
Companies that bucked the trend of growth over the first half of the year included: J.P. Morgan Fleming Asset Management, New York, which fell to $25.5 billion in total worldwide indexed assets as of June 30 from $29.9 billion as of the end of 2002; Goldman Sachs Asset Management, New York, to $27.2 billion from $28.6 billion at the end of 2002; AllianceBernstein Institutional Investment Management, New York, to $24.2 billion from $25.1 billion; ING Investment Management Americas, New York, to $13.8 billion from $15.1 billion; and BlackRock, New York, to $9.2 billion from $9.9 billion. SEE INDEX CHART