Index managers are seeing a renewed interest in passive equity and bond strategies from corporate and public pension funds as investors either move to take risk off the table or reallocate their risk to other asset classes.
“I am seeing clients move more into mainstream beta,” said Amy Schioldager, managing director and head of U.S. indexing at Barclays Global Investors, San Francisco.
The trend started last August when the credit crunch erupted and investors realized they had taken on more risk than they thought, she said. Now, “people are trying to understand risk more,” Ms. Schioldager said.
In the first six months of 2008, BGI had net inflows of $31 billion into its passive equity strategies. The firm saw net outflows from it's passive equity strategies of about $16 billion in 2007.
The heavy underperformance of some quantitative strategies that were meant to carry minimal risk, such as enhanced indexing strategies, also has increased interest in plain-vanilla indexing.
In May, trustees at the $38.7 billion Teachers Retirement System of the State of Illinois, Springfield, doubled the system's allocation to passive U.S. large-cap equities to 8% of total assets, while U.S. enhanced index equity was cut to 21% from 25%. Calls to Chief Investment Officer Stan Rupnik were directed to spokes-woman Eva Goltermann, who did not return calls for comment.
Rebalancing explains part of the move into passive, but “it's fair to say there's been some concern with active (management), particularly on the quantitative side,” said Eric Brandhorst, senior managing director at State Street Global Advisors, Boston.
Mr. Brandhorst said he's seen a resurgence of interest in passive strategies. The company could not provide data on net inflows.
Officials at Northern Trust Global Investments, Chicago, said a small number of their clients have begun to consider passive strategies within their U.S. equity portfolios. “Of the few examples that I've seen, (the investors) are going to reassess their allocations between active (management) and indexing,” said Alain Cubeles, senior investment strategist in the quantitative management group.
Northern Trust has seen the most growth in indexing in overseas equities markets as investors try to get exposure to emerging markets or small-cap international stocks — niches where active managers might have capacity constraints. Mr. Cubeles declined to provide data regarding flows into NTGI's strategies.
But at least one consultant questions if this is the right time to shift to passive strategies.