Traditional passive index investing among the largest 200 U.S. employee benefit plans experienced a significant drop, while enhanced index investing continued to rise in the 12 months ended Sept. 30.
According to data collected for Pensions & Investments annual survey of the largest plans, overall passive strategies among defined benefit plans in the 200 totaled $862.1 billion as of Sept. 30, a 0.9% decrease from the $869.6 billion reported by the plans a year earlier. When adjusted for the market, the decline in passive indexing comes to 15.1%.
The largest 200 defined benefit plans reported $359.8 billion in enhanced indexed assets as of Sept. 30, a 15.5% increase from the $311.6 billion reported a year earlier. Plan sponsors had increased their enhanced indexing investments by 15.5% the year before.
New York City Retirement Systems, ranked sixth for passive indexed assets as of Sept. 30, 2006, did not report its asset breakouts for 2007. Subtracting that funds $42.3 billion in assets from the earlier data, there is still a market-adjusted decrease of 10.7% in total passive indexed assets during the year.
During the year ended Sept. 30, the Russell 3000 returned 16.5%; the Lehman Aggregate index returned 5.1%; the Morgan Stanley Capital international Europe Australasia Far East index returned 25.4%; and the JPMorgan Global Government Bond index returned 8.3%.
Passive equity strategies experienced market-adjusted drops, while passive fixed-income strategies saw gains significantly above the market curve.
The largest 200 defined benefit plans reported a total of $601.8 billion in passive domestic equity strategies as of Sept. 30, a 21.4% market-adjusted drop from $657.2 billion reported a year earlier. The $141.7 billion in passive international equity strategies was an increase of 10.1% from the $128.7 billion reported a year earlier, but a 12.2% decrease when adjusted for the market.
Meanwhile, there was a market-adjusted increase of 27.6% in passive domestic fixed-income strategies, with $109.6 billion as of Sept. 30 compared with $81.7 billion a year earlier.
On the passive side, what I would say were seeing is a reallocation of assets, said Amy Schioldager, executive vice president and head of U.S. indexing at Barclays Global Investors, San Francisco, the largest U.S. index manager. Weve seen a decline on the U.S. equity side and increases to international equity and emerging markets and even some of the niche areas Overall, (theres) more of a reallocation away from domestic large cap and broad cap.
We have seen a reduction of what you would call plain-vanilla indexing, said Eileen Neill, managing director at Wilshire Associates.
The one area weve seen the most growth is what you would call the hybrid passive/active strategies, the portable alpha strategies, said Ms. Neill. I think there will be a continued trend toward more active risk-controlled strategies.
The Teacher Retirement System of Texas, Austin, reported $26.5 billion in indexed assets as of Sept. 30, a 2.2% decrease from $27.1 billion reported a year earlier. As of Sept. 30, all indexed assets were domestic bonds, while the system had reported $23.1 billion in passive domestic equity and $3.9 billion in passive international equity a year earlier.
The systems domestic and international equity portfolios were previously split between a true passive portfolio and an enhanced indexed portfolio. In 2007, those assets were moved into new management styles, according to an e-mail from Patricia Cantu, director of investment services.
The California Public Employees Retirement System led all funds in overall traditional indexing, although its assets fell 1.2% to $86.4 billion. When adjusted for the market, the decrease is 16%. The funds passive domestic equity assets dropped a market-adjusted 14.2% and passive international equity assets dropped a market-adjusted 20.3%.
The Sacramento-based fund, which had increased its allocation to enhanced indexing by 88% in the previous year, showed a decrease in enhanced indexed assets of 20.5% to $12.5 billion.
The external manager program overall hasnt been performing up to expectations with various enhanced indexing strategies, where were paying for alpha but getting beta, said Clark McKinley, information officer at CalPERS. Were considering shifting more of our index management in-house and otherwise exploring how we might generate better risk-adjusted returns in our global equity portfolio. Were also shifting to more of a 50-50 split for U.S. and non-U.S. assets in global equity.
On average, plan sponsors continued to increase their enhanced indexing investments. For example, the Virginia Retirement System, Richmond, reported $20.2 billion in enhanced indexed assets as of Sept. 30, a 42.3% increase from $14.2 billion a year earlier. Also, the State Board of Administration of Florida, Tallahassee, reported $12.2 billion in enhanced indexed assets as of Sept. 30, a 23.2% increase from a year earlier.
What were seeing this year, over 2006 and the end of 2006 through 2007, we saw increases in both passive funds as well as the enhanced funds, said Arlene Rockefeller, global equities chief investment officer at State Street Global Advisors, Boston, second-largest U.S. index manager. However enhanced was increasing at a faster rate than the passive assets were
North Carolina Retirement Systems, Raleigh, reported $29.7 billion in enhanced indexed assets as of Sept. 30, a 282.6% increase from $7.6 billion reported a year earlier. The increase was due to a change in classification of domestic fixed-income assets to enhanced from active, according to an e-mail from Christopher Morris, operations manager of the investment management division of the state treasurers office.