Cleaning up with enhanced
Among the UK pension funds that moved into enhanced index equities last year was the £550m (e792m) fund belonging to household cleaning products company Reckitt Benckiser UK. The fund awarded State Street Global Advisors a £50m enhanced indexing equity mandate.
The fund’s manager Kevin O’Berg said State Street was chosen after the fund, advised by Watson Wyatt, allocated the money to enhanced indexing equities. He said State Street had been chosen among “three or four other” managers considered in the selection phase.
“Because there are several different products going on under ‘enhanced indexing’, we looked at the market to see which of those was the most appropriate,” O’Berg explained. When the fund was being restructured in 2002, the size of the mandate had been already “earmarked” for enhanced indexing.
State Street also won a £150m global enhanced indexing equity mandate from copier company Xerox’s e2.3bn scheme in February 2004.
Pension funds in Europe, particularly in the Netherlands, are making use of enhanced indexing. However, many funds forgo enhanced indexing in favour of smaller volumes of active investment which they believe will produce the extra returns instead.
The Nedlloyd Pension Fund in the Netherland, for example, targets outperfomance with good selection of active managers. “We still believe that selecting the right managers will offer us the opportunity to outperform the indices,” says Ton Zimmerman, managing director of the Nedlloyd Fund.
“In the most important regions (the US and Europe) we use a style approach (value versus growth) to reduce risk and enhance the performance.
“Furthermore we invest in small and mid-cap funds in both mentioned regions.”
Last summer, US pension fund CalPERS said it was moving further into enhanced index strategies and away from index funds and active managers.
For its enhanced indexing, CalPERS selected 10 investment managers from 40 proposals to form part of a pool to invest up to $6bn in US equity strategies. The managers selected include Atlantic Asset Management,
Barclays Global Investors, Enhanced Investment Technologies, Franklin Portfolio Associates,
Goldman Sachs Asset Management, Pacific Investment Management Company, Prudential Investment Management Company, Smith Breedon Associates, State Street Global Advisors and
Western Asset Management Company.
Sean Harrigan, president of the CalPERS board, said at the time that enhanced indexing would help the fund “squeeze a little more active return out of our investment portfolio and round out our equity investment strategy opportunity set”.
In the pool, CalPERS uses fundamental, qualitative and synthetic enhanced cash strategies to provide a higher return per unit of risk. Funding for the enlarged pool was to come equally from the pension fund’s index and active equity managers.