Equity indexing by the top 200 pension funds surged in the year ended Sept. 30, with a few funds doubling or tripling their indexed portfolios.
Total indexed assets under management among the top 200 funds rose 15.5% to $377.5 billion from $326.7 billion; indexed equity assets (domestic and foreign) rose 28%, to $319.5 billion from $250 billion, while their total fixed-income indexed assets dropped 24.5%, to $58 billion from $76.8 billion. By comparison, the Standard & Poor's 500 Stock Index rose 29.74% for the year ended Sept. 30, 1995, the Morgan Stanley Capital International Europe Australasia Far East index rose 6.11%, the Salomon Brothers Broad Bond Index rose 14.06%, and the Salomon Brothers Non-U.S. World Government Bond index went up 13.89%.
The doubling or tripling of indexed assets at a few funds was a result of shifts between asset classes.
The Florida State Board of Administration, Tallahassee, which last year had $16.4 billion in indexed assets out of its $37.8 billion asset base, increased that figure to $34 billion in indexed assets out of $47.7 billion. Its indexed assets up 107%, while its total assets rose by 26%. The bulk of that increase was in indexed equities, which rose to $29.4 billion from $12.5 billion, while indexed bonds rose only to $4.5 billion from $3.9 billion.
The fund didn't shift its relationship between active and passive investments, but the dollar figures on both types of investments shifted as a result of various allocation decisions among asset classes made during the year, said Ash Williams, executive director.
The Florida fund added some enhanced index portfolios to its domestic equity component, and increased its exposure in international and emerging market equities, two areas where it had a substantial passive exposure, explained Mr. Williams.
Enhanced indexing is a relatively new area for the fund that offers more risk control and a fee advantage over active management, while allowing the fund to capture some marginal return, said Mr. Williams.
The changes were mainly achieved through hiring new index managers. But executives of the Florida fund also expanded some existing relationships, most notably with Wells Fargo Nikko Investment Advisers (now BZW Barclays Global Investors).
Wells already managed a substantial portion of the fund's indexed assets when Florida went to the firm for a passive product based on the EAFE index. The portfolio has been successful so far, said Mr. Williams, providing a very low-cost entry into that market and satisfactory returns.
The fund also worked with its global custodian, State Street Bank & Trust Co., to create an emerging markets index fund after it found there was no existing product pegged to the MSCI emerging markets index.
The California Public Employees' Retirement System, Sacramento, increased its indexed assets - all of them equities - 73%, to $38.5 billion from $22.2 billion, in a year when its total assets went up 18%.
The increase in indexing was partly due to an increase in the fund's equity allocation, said fund spokesman Brad Pacheco. The retirement system adopted a strategic asset allocation policy in 1994 that increased the equity component of the fund to 63% from 49% and reduced fixed income to 30% from 43%.
The increased equity allocation was mainly achieved by shifting fixed-income assets into indexed equity products, said the spokesman. Now, 82% of the fund's domestic equity portfolio is indexed, he said. Additionally, last May, the board approved a change in its $16 billion international equity allocation to 75% passive/25% active from 40% active/60% passive.
Among other large funds, growth in indexed assets did not outpace the indexes, but in most cases it did beat the growth in assets for the plan itself:
The New York City Retirement Systems increased its indexed assets 21% last year to $33 billion from $27.3 billion, while its total assets went up by 18% Indexed equities rose 29%, to $20.8 billion from $16.1 billion; indexed bonds rose only 8%, to $12.1 billion from $11.3 billion.
The New York State Teachers Retirement System, Albany, increased its indexed assets 27%, to $28.6 billion from $22.5 billion, while its total assets rose 20%.
The New York State and Local Retirement Systems, Albany, increased its indexed assets 19% to $25.4 billion from $21.3 billion; its total assets rose 18%.
The total indexed assets under internal management by the top 200 funds dropped from $147.6 billion to $144.4 billion. Internally indexed equities edged up 15%, to $134.4 billion from $116.6 billion - compared with the S&P 500's nearly 30-point performance - while internal fixed-income indexing dropped by more than two-thirds, to $10 billion from $31 billion, despite bonds' 14% runup during the year.
Among the top two overall indexers, California Employees' increased its total internal indexing assets 36% to $30.3 billion, while the Florida State Board increased its internal indexed assets 30%, to $15.5 billion.
While the number of searches for indexed managers has not increased significantly, the amounts being awarded to the indexers hired are sharply on the rise, said Jeanette Schreiber, partner at Eager & Associates, a Louisville, Ky., consulting firm.
According to the firm's TRACKER database, domestic equity index searches increased to 46 by late 1995 from 32 in 1994, but the size of the allocations handed out shot up to $24 billion from a $1.5 billion total in 1994. On the fixed-income side, the number of searches increased to 11 from seven, while the amount of assets rose to $6 billion from $700 million.
The exception was international indexing, where there was no change in the number of searches, and the assets dropped to $800 million in 1995 from a peak of $2.5 billion in 1994. However, Ms. Schreiber noted only about $500 million in assets were awarded in 1993, so the peak of 1994 might have been a spike.
Large public funds have been making significant commitments to domestic equity index funds for years, she said. "The real problem or challenge for active managers is going to be if we start to see a more significant movement of large corporate assets or medium-sized corporate assets," she added.
In a year of such strong market performance, pension executives will show some unhappiness with the performance of their managers and their fees, and as contracts come due, they move assets from active to passive management, she said.
"It's a recognition that it is difficult for active managers to outperform in a core product in an efficient market and I think it gets exacerbated when you have the kind of strong market we've had this year," said Ms. Schreiber.