The enhanced equity index businesses of PIMCO, Western, Smith Breeden and Atlantic got a boost from the $182.9 billion California Public Employees' Retirement System in June, when the Sacramento pension fund picked them as part of a 10-firm pool of enhanced equity managers (Pensions & Investments, June 28). The pool is down to nine now because CalPERS did not come to an agreement with Barclays Global Investors, San Francisco, on a contract.
Smith Breeden got $538 million from CalPERS, accounting for a big chunk of the firm's increase in enhanced equity assets under management.
Western Asset got $544 million, which represents 11% of total assets for the U.S. Index Plus product as of Dec. 31. Atlantic received $321 million, which made up about 30% of total assets in the company's enhanced stock indexing at year-end.
Although CalPERS' allocation to PIMCO has not yet been determined, the pension fund's decision to choose derivatives-based approaches was certainly a "great plus, particularly because of their prominence in the public market," said Tammie Arnold, a managing director at PIMCO.
At the same time, PIMCO's StocksPLUS strategy has benefited from "heightened awareness of the importance of alpha," she said.
Other traditional fixed-income managers also have become enhanced equity index players.
For example, BlackRock Inc., New York, had $2.2 billion in its Equity PLUS strategy as of Dec. 31; Payden & Rygel, Los Angeles, had $2.1 billion in its Enhanced Equity strategy; and Metropolitan West Asset Management, Los Angeles, had about $1.5 billion in its AlphaTrak strategy at year end.
Each bond firm's method varies, but generally, they port the alpha generated from a short-term, fixed-income strategy onto synthetic Standard & Poor's 500 index contracts such as swaps or futures. As a result, they provide institutional investors low-cost, low-risk alpha.
PIMCO's StocksPLUS relies on an enhanced cash portfolio to back the equity futures and is limited to a portfolio duration range of zero to one year. The firm also offers StocksPLUS Total Return, a risk-controlled active equity management strategy, but Sabrina Callin, a PIMCO product manager, said StocksPLUS is "the dominant focus from an official search and proposal standpoint." One reason: StocksPLUS has been around for more than 18 years, while the total return strategy has a 2.5-year track record.
Performance has been solid for bond managers' enhanced equity index strategies, according to Morningstar:
• PIMCO's StocksPLUS strategy returned 11.25% for the year ended Dec. 31, and 4.46% for three years. The benchmark for most enhanced equity strategies, the S&P 500, returned 10.87% for the year and 3.58% for three years. (All three-year numbers are compound annualized.)
• Atlantic's one-year enhanced index return was 11.59%; for three years, 5.36%.
• Western Asset's one-year return for its U.S. Index Plus product was 12.24%; its three-year return was 4.87%.
• Smith Breeden's one-year return for Equity Market Plus was 11.75%; its three-year return was 4.94%.
• Payden & Rygel's one-year return was 11.41%; its three-year return was 4.32%
• BlackRock's one-year return for Equity PLUS was 11.26%; its three-year return was 3.96%
• Metropolitan West's one year return for AlphaTrak was 12.06%; it's three-year was 3.24%. (This data was supplied by the company. There was no profile for MetWest in Morningstar).
"There is a real trend going on," said Atlantic's Mr. Sellers. "Big funds are replacing much of their traditional active core equities with passive, semi-passive and portable alpha.
"We've seen companies doing it for the last two years, and public funds seem to be doing it now."