Money managers are building steady business through overlay strategies that help pension funds capture excess returns on their cash positions.
Executives at Russell Investment Group, Tacoma, Wash., said the firm's overlay services business has grown more than 30% in the first quarter to $18.5 billion — the notional value of the assets with which Russell has exposure. That followed a 190% gain for 2005.
"We've moved from the early adopters, and now this is becoming mainstream, no doubt," said Michael Thomas, director, overlay services at Russell.
Clifton Group Investment Management Co., Minneapolis, has increased its overlay assets to $9.6 billion on a notional basis as of March 31 from about $2.86 billion a year earlier. About 80% of clients leverage the firm's flagship "Policy Implementation Overlay Service" for securitizing cash, said Ben Lazarus, director of sales and marketing.
Overall, what's driving overlay asset growth is alpha porting, whereby securitizing cash adds efficiencies for trading, Mr. Lazarus said.
State Street Global Advisors, Boston, reported $121 billion in worldwide overlay assets as of March 31, up 64% from $74 billion a year ago. State Street Global reports the total value of assets in which it provides "exposure management services," not their notional value, said Alistair Lowe, senior managing director at SSgA and director of the global asset allocation and currency teams. Assets in cash overlay strategies — SSgA does not disclose the actual amount of cash overlay assets — were up 137% for the year ended March 31.
(Methods for counting overlay assets vary. Some firms like SSgA count total plan assets where they are implementing any sort of overlay, while others, including Clifton and Russell, will add up the notional amount — the cash assets in which the overlay will be placed. )
The increased business overall comes at a time when pension funds are seeking to minimize "cash drag" — the risk of letting cash sit idle and thereby diminishing portfolio returns.