A gruesome bear market hasn’t shaken plan sponsors’ faith in active management. The majority of respondents to this month’s Pensionforum -- almost 81 percent -- report that despite the market turbulence of the past year, they did not increase their allocations to passive portfolios. And of the 19.3 percent that did increase assets to index managers, most raised the allocation 10 percent or less.
More than 18 percent of respondents report that none of their assets are indexed. Some 19 percent say they don’t have any passive U.S. equity mandates, but almost 70 percent say they have no passive U.S. fixed-income allocation. Of the plans that do index, most allocate between 26 and 50 percent of domestic equity to index portfolios, with roughly the same breakdown for bonds.
Looking abroad, indexing is even less popular. Only 22.5 percent use passive managers for foreign stock investing, while less than 2 percent use passive managers for international bonds.
Going forward, just 3.3 percent of respondents expect to index significantly more of their assets two years down the road, although a fair amount, 15.7 percent, indicate that they will index somewhat more. The bulk of respondents, more than 56 percent, say they expect to index about the same amount of assets.
Slightly more than one third of respondents use enhanced indexing for stock portfolios, but none use them for fixed income. Of those that do use the strategies, such portfolios are a decent slice of the index pie. Nearly half of the respondents say that enhanced funds comprise at least one fourth of the total index allocations. Smaller index managers have been touting their ability to offer more customized strategies, but just over 6 percent of respondents say they use such products.
What percentage of your total assets is indexed?
None 18.3%
1 to 10 percent 24.2
11 to 25 percent 23.3
26 to 50 percent 27.5
More than 50 percent 6.7
What percentage of your domestic equity assets is indexed?
None 19.2%
1 to 10 percent 14.2
11 to 25 percent 14.2
26 to 50 percent 30.8
More than 50 percent 21.7
What percentage of your domestic fixed-income assets is indexed?
None 68.0%
1 to 10 percent 7.4
11 to 25 percent 2.5
26 to 50 percent 14.8
More than 50 percent 7.4
What percentage of your international equity assets is indexed?
None 77.5%
1 to 10 percent 5.0
11 to 25 percent 5.0
26 to 50 percent 7.5
More than 50 percent 5.0
What percentage of your international fixed-income assets is indexed?
None 98.2%
1 to 10 percent 0.9
11 to 25 percent 0.0
26 to 50 percent 0.0
More than 50 percent 0.9
Since last year’s market volatility, have you increased the total amount of assets that your fund indexes?
Yes 19.3%
No 80.7
If so, by how much?
10 percent or less 55.0%
11 to 25 percent 30.0
26 to 50 percent 0.0
51 to 75 percent 5.0
More than 75 percent 10.0
What is the main reason?
To reduce risk 30.8%
Over the long run, active management can’t outperform the markets 26.9
To lower fees 0.0
The recent market volatility 7.7
Other 34.6
What percentage of your fund’s assets do you expect to index two years from now?
Significantly more 3.3%
Somewhat more 15.7
About the same 56.2
Somewhat less 14.0
Significantly less 0.8
Can’t say 9.9
Do you have any assets in an enhanced index fund that aims to outperform the underlying index?
Yes, equities 37.4%
Yes, bonds 0.0
No 62.6
If so, how much of your total indexed allocation is in an enhanced fund?
Less than 5 percent 21.3%
5 to 10 percent 23.4
11 to 25 percent 8.5
26 to 50 percent 25.5
More than 50 percent 21.3
Do you have any assets in a custom index fund?
Yes 6.2%
No 93.8
If so, how much of your total indexed allocation is in a custom fund?
Less than 5 percent 37.5%
5 to 10 percent 25.0
11 to 25 percent 12.5
26 to 50 percent 0.0
More than 50 percent 25.0
The results of Pensionforum are based on quarterly surveys of a univers of 800 corporate and 250 public pension plan sponsors. Because of rounding, responses may not total 100 percent.
