PIERRE, S.D.—The $5.9 billion South Dakota Retirement System invested $100 million in an alternative domestic equity indexing strategy developed by Research Affiliates LLC, Pasadena, Calif.
The pension fund is the first institutional investor for the strategy, which is based on six fundamental factors and eschews traditional market capitalization-weighted approaches.
Assets were taken from internally managed domestic equity portfolios. Until now, the South Dakota fund has invested entirely in active strategies, almost all of which are run in-house, including stocks, bonds and arbitrage.
Steve Myers, the state investment officer who retires on Jan. 10 after forming the investment office 32 years ago, said he has known Mr. Arnott for more than 20 years and has long sought a way to do business with him.
"I've recognized this is a very smart guy who has built a substantial reputation of research and integrity in the investment industry," said Mr. Myers. Mr. Myers' long-time deputy, Matt Clark, will take over from him.
Mr. Myers was attracted to Mr. Arnott's methodology, which creates a 1,000-stock universe weighed by fundamental metrics, such as book value, revenues and gross dividends. Traditional indexes weight holdings by market capitalization, which tends to overweight stocks that are overvalued and underweight those that are undervalued.
Some experts argue that Mr. Arnott's strategy is an active management approach and not a benchmark that follows set rules and is judgment-free, but Mr. Myers isn't troubled by the semantic differences.
Mr. Myers added there is a "first mover" advantage of investing early in alternative index, because he expects a significant amount of money to be plowed into the approach. In 1991, South Dakota fund officials invested in stocks they expected to be included in a forthcoming Standard & Poor's 400 midcap index, reaping the benefit as subsequent investors pushed up the value of those stocks.
