Has the flight from active management plateaued? Not yet, a new report from research and consulting provider Market Strategies International signals.
According to the report, which was released Thursday, more than half of institutional investors with $500 million or more under management said they could drop one of their asset managers in their coming year.
Their leading reason for pulling capital would be to move from active strategies to passive ones, according to the report. Author Linda York said the motivation is twofold: Actively managed portfolios have high fees and they’re struggling to outperform benchmarks. In other words, the same issues that have always driven investors from active to passive.
But this is the first time Market Strategies has polled institutional investors on the question, York said. The annual survey polled 371 investors managing $100 million or more between October 13 to November 28, 2017.
“I was surprised to find how high the proportion was of institutions looking to drop a manager and switch from active to passive,” York said by phone Thursday. “These institutions have the bulk of their assets in active management, whether that’s in private equity, hedge funds, or other offerings.”
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But York sees passive managers beginning to make a persuasive case to institutions.
“I think the bull market and the volatility makes passive look at lot better,” York noted. “If we do get to a correction, then the active managers can really have the opportunity to shine.”
One of the largest index-fund firms — Vanguard — stands to benefit the most from this shift. Institutions surveyed said they would most likely consider Vanguard over other passive managers when making the switch. This was true for nonprofits and pension funds alike that are eyeing a move, according to the research. BlackRock was the second choice in each category, while PIMCO ranked third.
Among pension managers looking to switch, American Funds came fourth followed by T. Rowe Price. Nonprofits put Dodge & Cox in the number four position, and American Funds fifth.
Whether institutional investors actually drop their active asset managers in favor of one of these passive options still remains to be seen, York said. Dropping one fund and picking another up takes a fair amount of time, she noted, so actions may not even be reflected in the 2018 survey results.
“We may not see a broad sea change next year,” said York. “This is something we’re tracking over time.”