The amount of indexed U.S. tax-exempt assets jumped 39.9%, to more than $600 billion from $429.7 billion, in the 12 months ended Dec. 1.
The increase was propelled by both a strong domestic equity market and institutions indexing more of their portfolios.
Assets indexed to the U.S. domestic equity indexes, which account for two-thirds of total indexed assets, increased 46.8% in the 12 months, and 19.9% in the six months ended Dec. 1, compared with the 37% and 14.89% gains, respectively, of the Standard & Poor's 500 Stock Index.
Indexed equity assets totaled $400.2 billion at Dec. 1, 1995, up from $333.76 billion on June 1, and $272.508 billion a year earlier.
Adjusted for market growth, equity assets grew 7.2% for the 12 months ended Dec. 1. For the six months, they grew a market-adjusted 4.4%.
Overall assets, adjusted for market growth, increased 5.3%.
Although the U.S. equity market sparkled, international equity indexed assets were the real stars, growing a market-adjusted 15% to $70.138 billion, despite a lackluster return in international markets as measured by the Morgan Stanley Capital International Europe Australasia Far East Index, which returned 2.52%.
Assets for the three largest managers in international indexed equity grew substantially during the last half of 1995. Assets of State Street Global Advisors, Boston, grew 18.7% to $23.701 billion; assets of BZW Barclays Global Investors, San Francisco - formerly Wells Fargo Nikko Investment Advisors - jumped 24.5% to $21.812 billion; and Bankers Trust Co., New York, moved up 17% to $9.184 billion.
Both State Street Global and BZW Barclays found 1995 a strong year for pension funds in both the United States and abroad.
BZW Barclays, which accounted for almost one-third of total assets in the survey with $191.111 billion, is the new entity created Dec. 31 when Wells Fargo Nikko Investment Advisors became part of Barclays PLC, London.
"1995 was the best year ever for new assets for both domestic and international equity," said Fred Grauer, chairman and chief executive officer of BZW Barclays Global. He said both the firm's U.S. and non-U.S. pension fund clients are taking global opportunities and diversifying around the world. Pension funds are increasing their reach into far-flung markets. Even with the problems in emerging markets in 1995, Mr. Grauer added, it was the biggest year yet for investments there.
Pension investors - with their long investment horizons and risk/reward parameters - find equities the best vehicles and the most efficient on a global basis, said Mr. Grauer. He added that the fundamental driving factor for international index investing is controlling cost and achieving reliable and constant growth.
Public funds were responsible for most of the new international indexed business at State Street Global, said Peter Leahy, managing director international structured products. Emerging markets investing was particularly heavy; while some plan sponsors increased their allocations to international overall, many moved into emerging markets for the first time, he said.
Global allocations and custom indexes are important factors for State Street Global's clients. Pointing to the proliferation of indexes available for non-U.S. markets, Mr. Leahy said one concern in international indexing is how to combine benchmarks to cover a global portfolio. Most State Street clients have moved away from the EAFE and are not predisposed to indexes weighted by market capitalization; instead they are looking at gross domestic product to measure a market.
"Making those decisions is a very interactive process. We help plan sponsors sift through the indexes." he said.
Mr. Grauer also said his firm did a lot of custom work in international indexing, adding "plan sponsors own more of the decision-making process." While 10 years ago plan sponsors were choosing among equities, bonds and cash, they now are choosing country weightings for their equity allocations and balancing their domestic equities with international weightings, looking for a global mix, said Mr. Grauer.
"There is a revolution in plan sponsor knowledge of global investing," Mr. Grauer said.
Indexed assets managed for non-U.S. pension funds by the leading index fund managers grew strongly in the past year. Thirteen managers reported $71.442 billion in indexed assets for non-U.S. pension funds. That figure is up 163% from the $27.095 billion reported by 11 managers in 1994. Of that amount, $22.292 billion is benchmarked to U.S. indexes, up more than 200% from the previous year.
The largest index fund managers with non-U.S. pension fund assets are BZW Barclays Global with $54.646 billion and State Street Global with $9.234 billion, followed by Bankers Trust with $2.694 billion (as of Sept. 30 and for Bankers Trust in New York only); Fidelity Investments, Boston, with $2.1 billion; and Alliance Capital Management L.P., New York, with $1.674 billion.
Part of the reason for the phenomenal growth in the survey is the addition of non-U.S. pension assets previously managed by BZW Investment Management's quantitative division. That division is now part of the new entity of BZW Barclays Global. Of the $54.646 billion in indexed assets for non-U.S. pension funds, $32.2 billion came from BZW Investment.
However, even when adjusted for the addition of the BZW Investment assets, indexed assets for non-U.S. pension funds by the managers in the survey grew 46%.
After such a strong year in the stock market, what does 1996 have in store? Mr. Grauer believes equities will continue to perform best relative to bonds and cash on a risk-adjusted basis. He does not see a crash ahead. Since Jan. 1, he said, BZW Barclays Global already has brought in $2 billion in net new assets.
Without attempting prediction, State Street's Mr. Leahy pointed out the year has started out well: Between Jan. 1 and Feb. 1 the firm added $2.6 billion in non-U.S. indexed assets.
Enhanced index assets grew 11.8% to $110.642 billion in the six-month period. Because the numbers include both equity and bond assets, a market-adjusted return could not be calculated. Enhanced indexed assets accounted for 19% of total indexed assets on May 31, but made up only 16.7% of total indexed assets as of Dec. 31.
Mr. Grauer sees strong growth for enhanced indexing. BZW Barclays, which had $24.937 billion in enhanced equity assets, added $2 billion in new assets during all of 1995.
For the survey, P&I also asked index fund managers how much of the domestic equity indexed assets reported were managed in S&P 500 index portfolios; the Russell 3000 Index; and the Russell 2000 Index.
Almost two-thirds or $258.497 billion of $390.674 billion in domestic equity indexed assets reported by index fund managers was managed in S&P 500 portfolios. Russell 3000 portfolios accounted for $49.153 billion, and Russell 2000 portfolios held $13.357 billion. The remaining $69.667 billion was in a variety of cap-weighted and style indexes from various sources. Not all managers broke out their allocations to various indexes.
Indexed bonds took a back seat to indexed equity assets both in domestic and international classes. Domestic bond assets grew 3.4% to $129.113 billion when adjusted for the 5.61% return of the Salomon Broad Bond Index return for the six months. International bond assets grew to $2.12 billion from $2.038 billion, or 5% when adjusted for the -0.94% return of the Salomon World Bond Ex-U.S. Index.
