Passive aggressive

To soothe their bear-market agita, more and more pension fund managers are turning to passive investing. This investing style doesn’t preclude painful losses, of course, but it does make the discomfort less expensive.

To soothe their bear-market agita, more and more pension fund managers are turning to passive investing. This investing style doesn’t preclude painful losses, of course, but it does make the discomfort less expensive.

Since last year’s market volatility, nearly 20 percent of respondents to this month’s Pensionforum survey have increased the total amount of assets tied to an index. Of those who have increased their indexing, many have done so fairly dramatically: 25.9 percent say they have increased their indexed assets by 11 to 25 percent, and an additional 11.1 percent report that they have gone as high as 26 to 50 percent. Most funds, however - 63 percent - have increased their indexed assets incrementally, pushing them up by less than 10 percent.

Fund managers seem to be concluding that, over the long haul, active managers can’t outperform the markets - 40 percent cite that as their reason for shifting to indexing. A further 34.3 percent say that indexing helps reduce risk. Just 11.4 percent mention lower fees. Only 2.9 percent of respondents report that market volatility inspired them to make the change.

More than 20 percent of respondents expect their percentage of indexed assets to increase somewhat or significantly over the next two years, compared with 8.1 percent who say their indexed exposure will likely decrease.

Fund managers clearly consider indexing equities to be a better bet than indexing their fixed-income holdings. Whereas 76.5 percent index some portion of their domestic equity allocation, 68.5 percent do not index any portion of their domestic bond portfolios.

At the same time, indexing seems to be mostly limited to U.S. investments. Almost three fourths of respondents don’t index any slice of their international equity portfolios, and a whopping 98.5 percent don’t index any portion of their international fixed-income assets.

What percentage of your total assets is indexed?

None 24.7%

1 to 10 percent 20.0

11 to 25 percent 20.7

26 to 50 percent 28.0

More than 50 percent 6.7

What percentage of your domestic equity assets is indexed?

None 23.5%

1 to 10 percent 17.4

11 to 25 percent 16.8

26 to 50 percent 21.5

More than 50 percent 20.8

What percentage of your domestic fixed-income assets is indexed?

None 68.5%

1 to 10 percent 8.1

11 to 25 percent 4.7

26 to 50 percent 12.1

More than 50 percent 6.7

What percentage of your international equity assets is indexed?

None 74.3%

1 to 10 percent 6.8

11 to 25 percent 2.7

26 to 50 percent 10.1

More than 50 percent 6.1

What percentage of your international fixed-income assets is indexed?

None 98.5%

1 to 10 percent 0.8

11 to 25 percent 0.8

26 to 50 percent 0.0

More than 50 percent 0.0

Since last year’s market volatility, have you increased the total amount of assets that your fund indexes?

Yes 18.9%

No 81.1

If so, by how much?

Less than 10 percent 63.0%

11 to 25 percent 25.9

26 to 50 percent 11.1

51 to 75 percent 0.0

More than 75 percent 0.0

What is the main reason?

To reduce risk 34.3%

Over the long run, active management can’t outperform the markets 40.0

To lower fees 11.4

The recent market volatility 2.9

Other 11.4

What percentage of your fund’s assets do you expect to index two years from now?

Significantly more 2.7%

Somewhat more 18.4

About the same 54.4

Somewhat less 6.1

Significantly less 2.0

Can’t say 16.3

Do you have any assets in an enhanced index fund that aims to outperform the underlying index?

Yes, equities 28.6%

Yes, bonds 3.4

No 68.0

If so, how much of your total indexed allocation is in an enhanced fund?

Less than 5 percent 22.4%

5 to 10 percent 26.5

11 to 25 percent 18.4

26 to 50 percent 10.2

More than 50 percent 22.4

Do you have any assets in a custom index fund?

Yes 7.0%

No 93.0

If so, how much of your total indexed allocation is in a custom fund?

Less than 5 percent 40.0%

5 to 10 percent 20.0

11 to 25 percent 0.0

26 to 50 percent 20.0

More than 50 percent 20.0

The results of Pensionforum are based on quarterly surveys of a universe of 800 corporate and 250 public pension plan sponsors. Because of rounding, responses may not total 100 percent.

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