Game changer or new danger?
That’s the question behind the spectacular rise of passive funds throughout this decade.
Their advocates see this trend as being as immutable as the momentum of a supertanker. According to our institutional survey respondents, passives have delivered good returns net of fees.
Their detractors retort that the rise of passives is due to a one-off boost from unconventional monetary policies in America, Europe and Japan. They also question what systemic dangers may be lurking in the background with this relentless concentration of assets in monolithic indices on autopilot.
Thus far, the debate has been emotional and polarising, generating more heat than light and has suffered from
• recency bias, which puts too much emphasis on recent trends to the exclusion of historical experience; and
• saliency bias, which assigns too much weight to the information that is predominantly on display to the exclusion of contrary opinion.
It is essential to develop a clear-eyed view by surveying the actual experiences of long-term investors. Like its physical counterpart, the investment universe is cyclical and adaptive. Styles go in and out of fashion. A time perspective is essential.
Focusing on pension plans worldwide, this report therefore addresses four pertinent questions:
• What is the current share of passives in investment portfolios, and what benefits have these funds delivered thus far?
• Are passives and actives competitive or complementary in the overall portfolio, and what is the underlying rationale?
• How are the respective roles of passives and actives in asset allocation likely to change over the rest of this decade, and what will their drivers be?
• What innovations will be required in passives to enhance their resilience?
These questions were pursued via a global survey of 153 pension plans in 25 countries with a total AuM of €2.9 trillion (details in Figure 1.1 on p.3 and p.III).
The survey was augmented with structured interviews with senior executives in 30 plans. All the information in this report is based solely on the survey and interviews.
The rest of this section presents the survey highlights and the key data findings that support them. More detailed results are given in Sections 2 and 3.
For ease of reading, the terms ‘passives’ and ‘actives’ are used throughout this report instead of longer titles such as “passive funds” and “active funds”.
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