Index managers see assets increase for first time since 2007

Index strategies bounced back in the first half of 2009, marking the first increase in assets since the end of 2007.

The reasons for the upturn: a recovering market and a flight to passive management, according to a semiannual survey by sister publication Pensions & Investments.

Total worldwide assets under internal indexed management — as reported by the 48 firms in the survey — grew 11% in the first six months of 2009, with managers reporting $4.67 trillion as of June 30, up from $4.18 trillion as of Dec. 31.

This is the first six-month period to show an increase since assets peaked at $5.65 trillion at the end of 2007.

International equities saw the greatest increase, with managers reporting $1.1 trillion as of June 30, up nearly 20% from $917.5 billion six months earlier.

For the six-month period ended June 30, the Russell 3000 Index returned 4.2%, the Barclays Capital U.S. Government/Credit Index returned 0.55%, the MSCI EAFE Index returned 8.42% and the Citigroup Non-U.S. World Government Bond Index returned 4.17%.

Barclays Global Investors continued as the top-ranked index manager, with $1.62 trillion in worldwide assets under internal indexed management as of June 30, up 12.5% from the end of 2008.

“We definitely saw extraordinary demand across our full suite of passive strategies,” said Carter Lyons, managing director of the Americas institutional business at BGI.

Interest in credit strategies and non-U.S. equities has been particularly strong, he said: “People are looking for a more diversified global basket of equities.”

State Street Global Advisors retained its hold on second place with $1.4 trillion — a jump of 8.3% — in worldwide assets under internal indexed management.

The first six months saw “increasing flows into our passive accounts,” according to Arlene Rockefeller, SSgA’s global equity chief investment officer. “People were looking to reduce risk because of the volatility, and their risk aversion characterized the first quarter. As we went on, especially coming out of the second quarter, we saw people getting less risk averse.”

“Early on, we were seeing people doing risk reduction asset allocation moves, sometimes moving out of equities entirely. Now we’re starting to see more focus on more equity markets and we’re seeing the continuing trend [of] very broad global mandates,” Ms. Rockefeller said.

The other managers in the top five for worldwide internally managed indexed assets also showed significant increases during the first half of the year.

The Vanguard Group Inc. saw the greatest percentage increase of the top five, up 22.6% in the first half to $592.5 billion. Northern Trust Global Investments reported $235.7 billion as of June 30, up 7.6%, while Bank of New York Mellon Corp. reported $130.1 billion as of June 30, up 5.7% from $123.1 billion as of Dec. 31.

But enhanced-indexed assets did not share in the bounce of overall indexed assets, dropping for the fourth reporting period in a row after reaching a peak in June 2007.

Still, the first-half drop was relatively small, with managers reporting $217.3 billion in U.S. institutional tax-exempt assets under internal enhanced-indexed management, a 2% drop from $221.6 billion as of Dec. 31. Enhanced-indexed assets had previously dropped 36.1% in the six months that ended Dec. 31 and 19.7% in the period ending June 30, 2008.

The quantitative strategies of many enhanced portfolios were much harder hit during the market downturn, said Eileen Neill, a managing director at Wilshire Associates.

“A lot of these strategies were enhanced cash, and they really got hit much worse than, say, fundamental managers, from the use of those instruments.”

The smaller drop for the most recent survey period is due to the recovering market, according to Ms. Neill, who said plan sponsors will continue to employ enhanced strategies, although “probably not adding to them.”

“There’s going to be a hesitancy to increase or broaden these strategies, but my sense is after the next market cycle, when we see more of a return to rationality, there may be an increased appetite,” she said. “The lesson learned is you should have some healthy mix of both” quantitative and fundamental strategies.

STILL NO. 1

BGI still ranked as the largest manager of enhanced-indexed assets in the U.S. institutional tax-exempt universe, reporting $69 billion as of June 30, a drop of 4.2% from year-end 2008.

“I think in general, enhanced and quantitative strategies have struggled in the last 18 to 24 months,” Mr. Lyons said. “In the long term, we think scientific techniques are very solid investment strategies.”

Overall U.S. institutional tax-exempt assets under internal indexed management also showed significant improvement during the first half, with managers reporting $1.94 trillion as of June 30, an 8% increase from the $1.8 trillion reported as of Dec. 31. When adjusted for market gains, total U.S. institutional tax-exempt indexed assets increased more than 4%.

The five largest managers of U.S. institutional tax-exempt indexed assets — the same names in the same order as the overall ranking — all reported increases in this category for the six months.

BGI reported $617.7 billion in U.S. institutional tax-exempt indexed assets as of June 30, a 16.3% increase from its year-end figure of $531.3 billion and a market-adjusted leap of 12.5%. SSgA saw its U.S. institutional tax-exempt assets rise 5.4%, to $520.5 billion, an increase of 2.6% when adjusted for the market, and Vanguard reported $177.1 billion as of June 30, a rise of 9.7%, or 6% adjusted for market gains. Northern Trust Global Investments and BNY Mellon both reported overall increases of 4%, relatively flat on a market-adjusted basis, to $132.4 billion and $120.8 billion, respectively.

Total worldwide assets in exchange-traded funds managed by U.S. institutional tax-exempt index managers went up to $597.8 billion as of June 30, an increase of 10.6% from Dec. 31. The ETFs managed for institutions constitute a very small portion of that, at $8.18 billion.

Rob Kozlowski is a reporter for sister publication Pensions & Investments.