In its old portfolio, ipac observed that active managers held big companies for a variety of reasons: to make alpha, to control risk (which “chews up risk capital,” Reynolds said) and to use as sources of liquidity for investments in other market sectors.

Generating alpha from large stocks was more difficult because these companies were exhaustively researched, providing managers with scarce new information to inform views.

“The unique insight into these big companies is less than in stocks that aren’t as well covered. There are opportunities in big companies, but you have a risk budget, and you want to pay managers to invest where they have an advantage,” Rogers said.

This strategy of prescribing sector limits to managers was appropriate for the domestic market, which is dominated by the resources and financials sectors and the big companies within them, such as BHP Billiton, which accounts for about 12 per cent of the market, and the big four banks.

With the performance of the market heavily influenced by so few companies, managers are usually forced to hold them to mitigate risk.

BGI and Schroder were the only incumbent managers who survived the overhaul of the portfolio. Those who lost mandates were Maple-Brown Abbott, Investors Mutual, MIR Investment Management, Bernstein Value Equities, Integrity Investment Management and Wallara Asset Management.

ipac sought managers which could accommodate large mandates, were genuinely interested in and supportive of the mandates given to them and had enough financial strength to pull through another market crash like that seen in the last 13 months.

Rogers said that institutional investors were, in general, aiming to make their domestic equities portfolios more straightforward.

“Complexity, as a general trend, peaked about 18 months ago,” Rogers said.