Enhanced indexing growth continued outpacing passive strategies in the year ended Sept. 30, 2006, as institutional investors continued to search for added returns, according to Pensions & Investments' annual survey of the largest employee benefit plans.
Traditional passive indexing, however, was basically flat over the course of the 12 months.
The defined benefit plans in the largest 200 employee benefit plans reported a total of $311.6 billion invested in enhanced index strategies as of Sept. 30, a 15.5% increase from a year earlier. That follows a 13% gain in enhanced indexing for the previous year and 27% gains in both 2004 and 2003. Enhanced equity strategies were up 22% as of Sept. 30, to $215.9 billion, while enhanced fixed income was up 3% to $95.6 billion.
Total investments in passive index strategies by defined benefit plans among the top 200 declined however, dipped less than 1% for the 12 months, to $869.5 billion. On a market-adjusted basis, total assets in passive index strategies were down 9%. Assets in passive equity index accounts increased less than 1% to $785.9 billion, but adjusted for the market, were down 8.7%. Fixed-income investments were down 13% to $83.7 billion for the year ended Sept. 30; on a market-adjusted basis, passive fixed income was down 16.1%.
In a low-return environment, institutional investors "see enhanced strategies as a way to add maybe 100 basis points (to their returns) with very little risk at the plan level," said Carter Lyons, strategic account manager for Barclays Global Investors, San Francisco. The trend toward enhanced indexing or even active strategies, and away from passive indexing will most likely continue into 2007, because investors realize "there are billions of dollars in passive strategies, and even (a difference of) 25 basis points matters," Mr. Lyons said.
"In a relatively low return environment, people are looking to get more out of performance," agreed Arlene Rockefeller, director of global enhanced equities for State Street Global Advisors, Boston. "That's why enhanced has been so popular, why we're seeing so much focus on higher alpha strategies."
The Russell 3000 equity index returned 10.2% in the 12 months; the Lehman Aggregate bond index returned 3.7%.