Russell Investment Group's overlay business continues to boom. The notional value of synthetic exposure is up nearly 50% in the first nine months of 2006 to more than $20 billion. That compares with a 149% leap in 2005 as overlays jumped to $13.7 billion from $5.5 billion.
One factor behind the surge is institutional clients trying to avoid slippage in their portfolios, explained Michael Thomas, director of overlay services at Russell Implementation Services, formerly known as Frank Russell Securities. Clients hire Russell to keep their total portfolios in line with their policy asset mixes or to manage frictional cash in the portfolio.
The other source of new business is demand for new strategies that employ overlays, such as portable alpha, tactical asset allocation or liability-driven strategies, Mr. Thomas said. Sometimes the types of strategies overlap, making it impossible to provide a breakout, he explained. Fees cost roughly one basis point, depending on how much in assets are overlaid and other factors.
Recent client wins include a policy implementation package for Aetna Inc.'s $5.3 billion pension fund, a cash overlay for Washington State Investment Board's $54.9 billion trust fund and a beta overlay for the $5.2 billion San Bernardino County (Calif.) Employees' Retirement Association.
And the outlook for overlay services remains strong. The freshly inked Pension Protection Act and new pension accounting rules will drive corporate defined benefit plan sponsors to use overlays to reduce volatility in funding ratios while trying to pick up some extra alpha, Mr. Thomas said. Also, public pension funds are add some alpha by adopting portable alpha strategies or making small tactical bets, he added.