Enhanced indexing continued its strong pace in 2005, amid institutional investors' ongoing search for alpha and heightened interest in portable alpha structures.
Plain-vanilla indexing, however, was stagnant, according to Pensions & Investments' annual survey of the largest employer benefit plans.
The defined benefit plans in the top 200 had a total of $269.8 billion invested in enhanced index strategies as of Sept. 30, 2005, a 13% increase from a year earlier. That follows 27% gains in total enhanced indexing in each of the 12-month periods ended Sept. 30, 2004 and 2003. Enhanced equity strategies were up 13.6% as of Sept. 30, to $176.9 billion, while enhanced fixed income was up 12% to $92.9 billion.
Total investments in passive index strategies by defined benefit plans among the top 200 remained stagnant however, showing growth of 0.5% for the 12 months, to $877.3 billion. On a market-adjusted basis, total assets in passive index strategies were down 9%. Assets in passive equity index accounts grew 4% to $781.1 billion, but adjusted for the market, were down 9%. Fixed-income investments were down 1% to $96.2 billion for the year ended Sept. 30; on a market-adjusted basis, passive fixed income was down 3.5%.
The Russell 3000 equity index returned 14.6% in the 12 months; the Lehman Aggregate bond index returned 2.8%.
One of the biggest changes on the list of indexers was the California State Teachers' Retirement System, Sacramento. In previous surveys, the fund listed its fixed-income portfolio (reported at $29 billion as of Sept. 30) as passive. For the current survey, however, it reclassified the assets as enhanced.
The 2004 figures were adjusted for CalSTRS before calculating the growth or declines cited above.