Why Institutional Investors Are Increasingly Using ETFs

(May 5, 2010) — Institutional investors are becoming more attracted to exchange traded funds (ETFs), a new report shows.

State Street Global Advisors’ Capital Insights report highlights the $300 billion Chinese sovereign wealth fund, the China Investment Corporation (CIC), to show the growing use of ETFs. The fund held $9.6 billion in US-listed securities, $2.4 billion, or approximately 25%, of which was invested in ETFs. CIC’s ETF holdings were largely concentrated in gold, commodity and energy-related ETFs.

According to Morgan Stanley, at the end of 2008, more than 2,900 institutions held ETFs representing a 15% growth on a year-over-year basis and nearly four times the number of institutional holders at the end of 2000. ETFs have fundamentally changed the way institutional investors construct portfolios, the report stated.

ETFs are used most widely by investment advisers and hedge funds, but SSgA says insurance companies, pension funds and endowments are increasingly adopting ETFs. According to the report, seventeen of the 20 largest mutual fund complexes use ETFs, while fifteen of the 20 largest hedge funds use them. Additionally, each of the five largest university endowments has ETFs among their top 10 holdings.

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(May 5, 2010) — The $211.4 billion California Public Employees Retirement System (CalPERS) won a court decision allowing it to proceed with its suit against the three biggest credit rating agencies — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — saying their faulty risk assessments caused $1 billion in losses.

On April 30, San Francisco superior court judge Richard Kramer ruled in favor of the largest U.S. public pension fund allowing it to proceed with its lawsuit, rejecting a request by the rating agencies to dismiss the fund’s claim of negligent misrepresentation, CalPERS spokesman Brad Pacheco said in an email, according to The Wall Street Journal.

The news reflects how rating agencies are facing heightened pressure and scrutiny for their role in the economic crisis. Many people believe that these agencies, blamed for inflated ratings to risky debt to win more business from issuers, were directly responsible for the credit crisis.

In its suit filed July 9, the California fund claimed the three major bond-rating companies made “wildly inaccurate” risk assessments on structured investment vehicles. CalPERS asserts it had bought $1.3 billion of debt issued by Cheyne Finance LLC, Sigma Finance Inc and Stanfield Victoria Funding LLC, SIVs that received highest ratings. The fund suffered heavy losses when these investments collapsed in value in 2007 and 2008.

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While denying wrongdoing, the rating agencies are up against similar suits by institutional investors in Manhattan federal court.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742