Indexed asset management worldwide was given its annual work-out in Barcelona at the World Cup of Indexing, organised by IMN, and was found to be in good shape, despite the assault of poor equity markets.
The development of indexing in Europe was put in context by Massoud Mussavian of Goldman Sachs International in London, who pointed out that in the US some 35% of pension assets were indexed and in the UK the figure was around 30%. But the growth was to come from markets such as the Netherlands and Sweden where the proportion was only 20%, and in Japan where it was10%. In Germany and France the figure iss in the 5–10% range, he reckoned. “We are in a ‘sweet spot’ in Europe as far as the future of the business was concerned.”
The shift to customised benchmarks was pointed to by William Oulton of index provider FTSE, who said that increasingly there was a move from standard benchmarks to those less some component. In addition to a standard less component X, providers were seeing demand for indices adjusted by GDP, currency or region. Interest in socially responsible investment indices was growing. “SRI activity is increasing dramatically.”
The Boots pension fund decision to switch totally to fixed income was described as a “no brainer” by Watson Wyatt partner Peter Ludvik, “it made sense for them to lock in their fund’s surplus”. Discussing the changing asset allocation scenario, he thought there would be three categories of UK pension fund, the first would be like Boots, which did not want to take any risk and would allocate 90% or more to bonds. “Then there would be those who go 50/50, bonds equity split.” The other schemes were the risk-takers, which could afford to take the risks and stay in equities.
Strategic asset allocation was also tackled by Chris Woods of State Street Global Advisors in London, who argued that pension funds investing in equities were taking hedge fund risks, when their liabilities look like “inflation-linked corporate debt”. Gone were the days when “a euro of equities is worth more than a euro of bonds”. So the need was to create a “notional benchmark” to best match liabilities, that would be 100% debt, probably index-linked corporate debt.
Investment managers would be hired to beat the benchmark, but with strict risk controls. “Ideally the manager would use index-linked corporate debt,” said Wood. He acknowledged the supply was inadequate but would grow, but that in the meantime synthetic instruments would need to be created. Alternatives and equities can be invested in only if the fund had a surplus. “Balanced pension funds were lucky in the past, and may now be the verge of being unlucky,” said Wood.
Looking at the question of when to be active and when passive, Peter Norman of AP Fonden 7 in Stockholm, said the exten to which the fund went indexed depended on the efficiency. The US was the only market were the fund was passive throughout, in Europe it was half indexed and half active, while Japan and Asia were managed 100% actively.
The Fonditel approach to asset management was to follow a core-satellite model, explained Santiago Fernández Valbuena of the Madrid-based fund manager. “But we run an active tactical asset allocation satellite, around the indexed core.” He pointed out that the managers used futures, but were shifting to exchange traded funds for simplicity.
Enhanced indexing – providing 1% return above benchmark - was just the tonic for down markets in the view of Philipp Kauer of Credit Suisse First Boston. “It had explosive growth in the US and was now moving into Europe.”
He rejected the notion that enhanced was “souped-up indexation” or “watered down active management”, as an investment process was needed. The potential was to add 50–150 basis points. “Fees do vary between 15 and 30bps.”
Changing trends in index derivatives trading was the focus of Ignacio Solloa, director of markets at MEFF, who said there was a trend from Euroland to Europe-wide indices, particularly on the sector indices. “But country indices are far from over, though there was increasing correlation between countries and regional indices.” At the momemt, European sector indices trading had a low volume, but he expected to see growth in the near future.