Pension schemes will steadily increase their holdings of low cost index-tracking funds in a worldwide trend that is set to intensify competitive pressures confronting traditional active fund managers.
Assets held in passive funds by pension schemes will grow by around 6 per cent a year over the rest of this decade, according to Create-Research, the consultancy, which surveyed the investment intentions of 153 pension schemes across 25 countries that control combined assets of almost €3tn.
Create found that four out of five pension schemes planned to increase their assets held in passive vehicles, spread across segregated accounts, index-tracking mutual funds and ETFs.
Fewer than one in ten of the pension schemes expected to reduce their passive holdings, while 15 per cent of the respondents predicted that their passive exposures would rise by more than 10 per cent annually for the rest of the decade.
Amin Rajan, chief executive of Create, said there had been a “fundamental reshaping” in the way that pension schemes managed their portfolios, partly due to market distortions caused by quantitative easing programmes of central banks introduced in response to the 2007/08 global financial crisis.
“Investors can pick the best of what the active and passive worlds offer to meet their needs. Passives are not perceived as an ‘all-weather’ choice that work in both good times and bad or as a perfect substitute for actives. Stockpicking is not going away. But the burden of proof is shifting while passives attract a growing share of the market,” said Mr Rajan.
Central banks’ QE programmes have inflated stock and bond markets globally, making it more challenging for active managers to beat their benchmarks once fees are taken into account.
“There is a one in 20 chance of picking a successful active manager. The chances of picking multiple good ones are minuscule,” said one of the survey’s respondents who asked not to be named.
Low fees were highlighted as a leading attraction of passive funds by 58 per cent of pension schemes. Many believed there was room for further improvement, with almost half (48 per cent) wanting reductions in fees and charges for passive funds to make them more attractive.
“Fees have become the North Star of investing,” said another pension scheme manager.
Create found widespread concern about the drawbacks of index-tracking strategies, with 68 per cent of the survey’s respondents worried that passive funds rely on yesterday’s winners and inflate valuations. This makes booms and busts more likely.
Mr Rajan said the real test of the resilience of passive strategies would come in the next market correction.
“Passive investors can suffer full market losses when the market turns, possibly more than active investors who can switch into cash,” he said.
However, less than a quarter of pension funds said they expected passives to lose favour when active strategies started to outperform once again, suggesting index trackers have become firmly rooted in institutional investors’ portfolios.
BlackRock, the world’s largest money manager, forecast this month that assets held in ETFs would more than double to $12tn over the next five years and possibly reach $25tn by the end of 2027.
“Investors are poised to increase their use of ETFs as tools to beat the market. ETF growth is closely tied to the growing recognition that asset allocation is more important than individual security selection,” said Martin Small, head of US iShares at BlackRock.
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