Pension Funds Look To Alternative Indices

October 03, 2012

Two large European pension funds have announced that they are to use Russell benchmarks as the basis for investment strategies, amidst growing institutional interest in passive investing using alternative indices.

The Danish Teachers’ Pension Fund (Laerernes) says it has invested approximately €120 million (US$155m) in a fund tracking the Russell fundamental emerging markets large company index, the first time the pension fund has used an alternative index strategy.

Similarly, the Dutch Metalworkers Pension Fund (PME) has invested an undisclosed amount in segregated mandates tracking the Russell defensive US and developed Europe indices.

Morten Roed Eriksen, portfolio manager for Laerernes, told “We have chosen an alternative index as we like a rules-based approach to gain a certain type of exposure that we deem desirable. We look for a way to implement a value tilt in our EM equity exposure, and think passive indexing to the Russell fundamental index will be an efficient way of doing this.”

Alternative indices can often offer a better risk/return profile than other indices, according to Nick Spencer, director of institutional consulting for Russell Investments in Europe. He told “While they won't outperform in every environment, we recommend an allocation to alternative indices as a good long-term option for investors."

He added: "We are seeing a growing interest from pension funds in this area. This comes on the back of pension funds having a greater focus on their own liabilities, which are to pay pensions far into the future, and they are therefore looking at how to create more stable long term investments."

In 2011, Russell and Research Affiliates launched the Russell fundamental index series, which selects and weights constituents according to economic measures of company size, as opposed to market capitalisation.  At the same time Russell launched “Stability” indices as a way for investors to consider quality and volatility, in addition to stock prices, as ways of evaluating company risk.


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