Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
July 26, 2004 01:00 AM

Control, cost behind IBM’s in-house index strategy

Ricki Fulman
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    WHITE PLAINS, N.Y. — Ask Jay Vivian why IBM believes in indexing, and he'll give you two reasons: cost and control.

    "We can do as good a job as an outside firm at a lower cost and at the same time maintain total control in terms of custody, visibility, guidelines and risk controls. We can have a tighter tracking error," said Mr. Vivian, assistant treasurer/managing director, IBM Retirement Funds, in an interview.

    Nearly one-third of the $42 billion defined benefit assets of International Business Machines Corp. are indexed equities, all managed by an in-house staff of six.

    $12.6 billion for U.S.

    In addition to managing $12.6 billion for the U.S pension plan, the in-house staff also runs a total of $2 billion in indexed equities for four subsidiary retirement plans: IBM Netherlands, IBM Germany, IBM Switzerland and IBM Canada. Mr. Vivian wouldn't disclose sizes of the individual funds, saying only they range from $1.3 billion to $8.3 billion.

    The five portfolios are each managed as stand-alone separate accounts, which allows for better control and better reporting. Mr. Vivian noted that each of the four subsidiary plans hired the U.S. IBM staff to manage its passive equities after conducting a manager search.

    Currently IBM is running around $10.4 billion in U.S. equities against the Russell 1000 index benchmark; $3.1 billion in international equities against the Morgan Stanley Capital International Europe Australasia Far East plus Canada; and $500 million in indexed real estate investment trusts (for the U.S. plan only) against the Morgan Stanley REIT index.

    In 2003, IBM's domestic passive equities "were on benchmark," up 29.9%, he said; its non-U.S. passive equities rose 40.1%, beating the MSCI EAFE+Canada, which gained 39.4%; and the REIT portfolio also matched its benchmark, posting -0.1%.

    IBM's $22 billion 401(k) plan is all indexed, but managed by outside firms because the daily trading in the different funds results in large cash flows, which would require more complex "machinery" than IBM has. "We rebalance (the indexed equities in the defined benefit plan) around once a month, which we can handle because it doesn't involve moving as much cash around," explained Mr. Vivian.

    The U.S. plan is about in 68% equities, which includes private equity, public and private real estate) and about 32% in bonds. Within the equity allocation, about 75% is indexed; in fixed income, about 20% is indexed.

    Two years ago, IBM increased the indexed equity portion of its U.S. plan to 75% of equities from 50%. "We're biased toward indexing. The markets have gotten more efficient. If it were easier to find active managers that generate more excess return we might switch it again but those fees aren't zero," Mr. Vivian noted.

    "You might find active managers charging really low fees of around 30 to 40 basis points. If it's a small-cap or emerging market manager, you might pay 70 to 110 basis points. We can run the indexed portfolio for under one basis point. For active management, we need to be sure they're generating 200 basis points if we're going to have to pay 100 basis points. It's great if we're assured they can do it, but managers don't always make 200 basis points over the benchmark. Sometimes they just make benchmark."

    No enhanced strategies

    IBM doesn't currently use any enhanced index strategies. "We've done it in the past, but we don't believe it's worth the extra effort. It's hard for them to consistently outperform," Mr. Vivian said.

    The plan does use active managers for small-cap equity mandates, a change instituted about five years ago. The fund used to run the indexed portfolio against the Russell 3000 index. "Small cap is good for active management, and it has done well," observed Mr. Vivian. He declined to name managers, citing company policy.

    The U.S. plan doesn't use any outside managers for equity indexing, but fixed income is another story.

    "There are so many more securities in the fixed income Lehman Aggregate and Lehman Universal indexes (that) it would be too difficult to manage in-house," Mr. Vivian said. The non-U.S. plans do use some outside indexers for equities, but Mr. Vivian would not elaborate.

    While the IBM in-house staff has no plans now to expand into running money for outside investors, Mr. Vivian does expect to manage passive assets for some of the other 26 IBM subsidiary retirement plans.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    New SEC Rule on Fair Pricing Determination Needs Careful Consideration
    Sponsored Content: New SEC Rule on Fair Pricing Determination Needs Careful Consideration

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    June 20, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit