The California State Teachers Retirement System, one of the nation's largest public pension funds, Tuesday announced a major change in the management of its portfolio that could signal a trend among other large public pension funds.
In a move to dramatically cut management costs while increasing investment returns, the fund said the part of its portfolio invested in bonds and other fixed-income investments will be managed by computer to replicate a bond-market index, rather than being managed by professional money managers.
The shift is believed to be the largest such change for a fixed-income portfolio of a public pension fund, said Thomas E. Flanigan, investment chief for the fund, which has assets of $23 billion. Of that amount, about $6.6 billion will be affected by the shift.
"We think bond indexing is going to be the coming trend," he said. Such a trend is needed, he added, because some public pension funds have gotten so large that using professional money managers has become too costly and cumbersome. By using computers, indexation costs only about one-tenth the charge for professional money management, Flanigan said.
Just as important, he said, is that indexes outperform professional money managers 75% of the time on a long-term basis. Indexes, such as the Dow Jones average of 30 industrial stocks or the Standard & Poor's 500-stock index, are comprised of a representative group of stocks, bonds or commodities. They are commonly used to reflect price movements in those markets.
The concept of indexing has been growing among institutions, but primarily involving the stock portions of their portfolios. The California State Teachers Retirement System already has 80% of its equity portfolio tied to indexes managed by Wells Fargo Bank, Flanigan said. Several other large public pension funds, including the New York State Common Retirement Fund, also have tied their equity portfolios to indexes, Flanigan said.
Flanigan said the California State Teachers Retirement System will use a bond index, developed by the investment banking firm of Salomon Bros., called the Large Pension Fund Baseline Index.