CalPERS to Commit to Multistrategy Index Fund

(November 2, 2011) — The California Public Employees’ Retirement System (CalPERS) is looking to put up to $5.7 billion in a multistrategy index fund.

The largest public pension fund in the United States to looking for “low-cost index fund products” for several of its trust funds, including the $902.3 million Supplemental Income 457 Plan, $462.9 million State Peace Officers’ & Firefighters’ Supplemental Plan, and $18.5 million Supplemental Contributions Plan, an RFP on the scheme’s website shows.

Asset classes consist of domestic bonds, domestic large-cap and smidcap equity, global equity and global public real estate.

The efforts by the US public fund to search for a multistrategy index fund manager follows a survey of European institutional investment professionals by the EDHEC-Risk Institute that revealed that conventional cap-weighted and debt-weighted indexes remain popular. The popularity of conventional indexes come despite their shortcomings and the development of alternative indexes, the firm found.

“In the entire history of indices, country-based capitalisation-weighted indices have proven to be the most popular indices for both equity and bond markets,” the survey noted. “Such indices are often used as a bellwether for the economy, as they are supposed to represent market trends. Nowadays, a growing demand for indices as investment vehicles has led to innovations including new weighting schemes and alternative definitions of sub-segments.” The survey stated: “Indexation continues to play an important role in global asset allocation. Total worldwide assets under internal indexed management rose to $5.994 trillion as of June 30, 2011, a 25% increase over $4.781 trillion as of one year earlier…In view of the growing volumes in assets under management in passive indexing strategies, a great many index providers have emerged worldwide; not only the organisations specialising in the index service but also stock exchanges, as well as investment banks. Each provider has created or is creating a host of indices representing a full complement of asset classes, as well as asset class subsegments.”

The EDHEC-Risk Institute discovered that liquidity, objectivity, and transparency are the most important quality criteria investors have for indices. Meanwhile, respondents suggested that a buy-and-hold property of an index is not of prime importance to respondents, explaining greater attention to new approaches based on dynamic rebalancing. In response to confusion between indexing and “passive investing,” 58% of respondents stated that they do not think that indices should only reflect passive strategies. However, respondents indicated that indices should not be based on alpha (75.2%), “which suggests that instead of generating ‘abnormal’ returns, investors indeed ask for ‘normal returns’ from an index,” the survey concluded.