Growing concerns over inflation and increased comfort with the security among investors resulted in a big jump in assets invested in Treasury inflation-protected securities in 2007, data from Pensions & Investments annual survey of the largest money managers.
Internally managed assets invested in TIPS for U.S. institutional tax-exempt clients totaled $59.7 billion as of Dec. 31. That was up 49% from the year-earlier figure, despite a drop in the number of managers in the survey.
Pacific Investment Management Co., Newport Beach, Calif., held onto the top spot in the ranking, reporting just shy of $13 billion in TIPS assets internally managed for U.S. institutional tax-exempt clients.
But State Street Global Advisors, Boston, leaped into the No. 2 spot, with $8.5 billion in TIPS, a 77% increase from the $4.79 billion it reported the year before.
James Mauro, senior portfolio manager at SSgA, said the firms TIPS business grew significantly because plan executives increasingly are looking to hedge against inflation risk, especially as a component of future liabilities. Additionally, TIPS work well as a diversifier because they have a low correlation with bonds and a negative correlation with equities, Mr. Mauro said.
Were seeing a lot of demand and interest inquiries from clients. This is not a product you have to go pitch, Mr. Mauro said. People see it (inflation) in the headlines. Its close to home. You see it when youre filling up your gas tank, when youre buying food at the grocery store.
Other managers also reported strong gains. PIMCOs $12.99 billion was an increase of 34%; Barclays Global Investors, San Francisco, reported $6.8 billion, up 36%, and BlackRock Inc., New York reported $3.6 billion, a 44% increase from a year earlier.
A growing comfort and understanding of the security among investors could also explain the growth, said Steven J. Foresti, managing director and head of the investment research group at Wilshire Consulting, a business unit of Wilshire Associates Inc., Santa Monica, Calif.
TIPS were introduced by the U.S Treasury Department in 1997. More data are now available for plan sponsors to examine when considering an initial investment or an allocation increase, Mr. Foresti said. Also liquidity concerns have largely dissipated.
Theres more and more data available so we can look at their track record, Mr. Foresti said. Theres more general comfort and greater understanding. TIPS have very attractive characteristics if you want assets that have sensitivity to inflation.
SSgAs Mr. Mauro said liquidity concerns have subsided as more players have come into the market.
SSgA saw its greatest growth in TIPS among separately managed accounts for large institutional clients, Mr. Mauro said. Some funds, which had no allocations to TIPS, went to allocations of 2% to 4%.
We have clients and consultants that had not previously shown an interest that are now talking about it, he said.
Others clients with allocations of 2% to 4% bumped up to 5% to 7%. Some even increased their allocations to 10% and more; he declined to identify them.
BGI saw an increased interest in TIPS from defined contribution clients, as well as defined benefit plans and endowments, said Matt Tucker, head of fixed-income investment strategy for BGI. With rising oil prices and interest rate cuts, theres been a general flight to quality, he said.
With TIPS, youve got the safety of the U.S. government backing, which makes them attractive, he said.
While the recent past has been good for TIPS, the future is a little murkier. Because the securities now offer lower yields, pension plan executives need to consider valuations more closely, Mr. Foresti said. Certain plans, such as frozen plans not sensitive to inflation, do not need TIPS as much as other plans that are sensitive to inflation, he said.
Mr. Mauro said low real yields might make TIPS unattractive now, but with inflation pressures rising, an increase in TIPS allocation could be a theme going forward.
Contact Jennifer Byrd at [email protected]