Citing Fee Pressures and Limited Resources, Institutional Investors Have Started to Go Passive in Fixed Income

More than a third of investors surveyed by State Street Global Advisors had at least 20 percent of their fixed income portfolios allocated to index strategies.

Illustration by II

Illustration by II

Even as investors embraced passive stock funds, active strategies continued to dominate fixed income — but indexing is making headway.

Amid growing fee pressures and an ever-changing market environment, some institutional investors are looking for more cost-effective ways to allocate to fixed income. In a State Street Global Advisors survey of 700 global institutional investors released Tuesday, 37 percent of respondents said that over a fifth of their fixed income portfolios were allocated to index strategies. This includes 7 percent who said that index strategies comprised over 30 percent of their fixed income portfolios.

The larger the investors, the greater their use of fixed income index strategies. According to the survey, 57 percent of the largest investors — defined at having over $10 billion in assets under management — said they had over one-fifth of their fixed income portfolio allocated to passive strategies.

State Street defined a fixed income index strategy as any portfolio of fixed income securities that tracks the performance of a market index.

The rise of index investing in fixed income is partly a result of limited resources for investors managing fixed income allocations. For example, 46 percent of respondents said that their organization is “under a lot of pressure to make more effective use of fees in its fixed income allocation,” and 45 percent said that their organization’s “resources for managing [its] fixed income investments are currently very constrained,” the report said.

“Fixed income indexing has developed tremendously in sophistication, scope, and delivery over the past few years,” the report said. “Indexing’s ability to capture the full performance potential of even the most complex fixed income exposures, in a highly cost-effective way, means that active management is no longer the default choice for fixed income investors.”

But don’t expect a complete shift away from active. Over the course of the next year, institutional investors largely aren’t planning on making drastic changes between active and passive strategies. Seventy-six percent of respondents said they plan to maintain their current balance between index allocation and active strategies, while only 14 percent said they plan to meaningfully increase their index allocation.

Respondents who said they plan to increase their index allocation cited improving performance transparency, efficiency, and cost effectiveness as drivers for the change.