Fri, 09/05/2014 - 10:06
Many institutional investors, particularly corporate pensions and 501(c) tax-exempt organisations, are forecasting substantial increases in their allocation to passively managed investments over the next three years.
While the majority of institutional assets are currently actively managed, the shift anticipated by corporate pensions and tax-exempt institutions, which collectively represent nearly half (49 per cent) of all institutions, could dramatically affect the market share of the leading institutional asset managers.
These and other findings are included in the annual US Institutional Investor Brandscape, a Cogent Reports study by Market Strategies International.
According to the report, 39 per cent of corporate pensions and 11 per cent of tax-exempt institutions plan to decrease their holdings in actively managed US public equities over the next few years. In addition, 11 per cent of tax-exempt institutions report a desire to reduce their active US fixed income allocations. Corporate pensions anticipate an increase in allocation to US fixed income, both active and passive, while tax-exempt institutions show more interest in passively managed equity strategies in the US and international markets.
“While the potential shift away from active management should be enough to sound the alarm for institutional asset managers, it is more important for these firms to understand the drivers of these changes from the customer’s perspective,” says Linda York, vice president and lead author of the study. “Corporate pensions are increasingly focused on de-risking their portfolios and are citing concerns about fees as their main reason for seeking passive investments. In contrast, tax-exempt institutions are much more likely to be questioning the value that active management provides, and are showing some scepticism that active management is worth the price and delivering performance over and above that which passive management offers.”
The study asked institutional investors to identify the primary drivers for their anticipated increases to passive management. One-third of all pensions, including 29 per cent of corporate pensions, rate costs and fees as their top contributing factor, compared with just six per cent of tax-exempt institutions. The question of active management not performing or not worth the price is cited by more than one-quarter of non-profits, compared with just eight per cent of corporate pensions.
“The impact on institutional asset managers is clear,” says York. “These firms must continually prove the value of their offering – whether active or passive – and deliver on the strong, consistent investment performance that these institutional investors expect.”
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