Index assets up 18.4% for year; total worldwide tops $7 trillion

Passive management is actively soaring.

Worldwide internally managed index assets increased more than a trillion dollars to $7.3 trillion in the year ended June 30 — an 18.4% increase — according to Pensions & Investments' annual survey of managers of indexed assets.

The surge differs drastically from the previous year when index assets remained relatively flat, increasing only 1.8% to $6.17 trillion.

See associated story: ETF assets up 21.4% for year; top 3 providers hold their rank

“Active management is a very competitive game, and to be successful, it's tough,” said Jane Welsh, London-based senior investment consultant at Towers Watson & Co. “Some clients have decided that they don't have the internal resources to go out and find superior active managers and decided to go for a passive approach instead.”

Jamie Farmer, managing director of index investment strategies at S&P Dow Jones Indices, New York, said passively managed assets consistently outperform their actively managed counterparts over long periods of time.

According to the annual S&P 500 Indices Versus Active Funds Scorecard, active managers in almost every category underperformed their benchmarks in 2012: 63.25% of large-cap funds underperformed, 80.45% of midcap funds underperformed, and 66.5% of small-cap funds underperformed.

The order of the largest managers of indexed assets in P&I's ranking remained the same as the previous year: New York-based BlackRock Inc. led the pack with $2.297 trillion, a 12.7% increase from a year earlier, followed by Boston-based State Street Global Advisors with $1.684 trillion, a 22.3% increase.

“Some of that has to do with market performance,” Ms. Welsh said. “It's not all new money that's gone into indexation; it's just that equity markets have performed well.”

For the year ended June 30, the Russell 3000 index returned 21.46%; the Barclays Capital U.S. Government/Credit index, -0.62%; the Morgan Stanley Capital International Europe Australasia Far East index, 15.5%; and the Citigroup Non-U.S. World Government Bond index, -5.72%.

In addition to market performance, more money is being poured into passive management because of cheaper fees and higher transparency.

“Bigger funds are becoming much more careful about how they are spending their money and what it costs to have their assets managed,” Ms. Welsh said.

Among the 58 managers surveyed, $3.371 trillion was managed internally in U.S. equity, up 22.7% from the 60 managers in the previous survey, while $2.081 trillion was managed in international and global equity, up 20.2%.

“We're starting to see some turnaround here in the U.S. market,” said John Jacobs, executive vice president-global information services of Nasdaq OMX Group Inc., based in Rockville, Md.

“People come into the market and have to balance where else they're going to put their money. Europe isn't the strongest economic picture, there's not the same amount of growth in China and there's unrest in the Middle East.”

Even though passive domestic equity is dominating, the uptick in international and global equity is still a vast improvement from the previous year, when assets managed in international and global equity decreased 6%.

“Last year, we saw a lot of money moving into emerging markets, but this year that has stalled, so there's been a big change in terms of where people are putting their money,” said Amy Schioldager, BlackRock's senior managing director and global head of beta strategies. “One of the biggest trends is clients moving toward passive equity vehicles, and we are seeing it in both our institutional and retail space.”

BlackRock's international and global equity indexed assets increased 27.2% to $887.9 billion, while domestic equity assets increased 20.1% to $804.9 billion.

Ms. Schioldager said she has also seen growth in defined contribution target-date index funds, alternative betas or non-traditional index equity vehicles, and increased interest in the low-volatility space.

“The pull-back in emerging markets and the stuttering of the U.S. economy are reasons more assets are being poured into passive vehicles,” Mr. Farmer said. “There's less exposure to commodities and bonds because of Fed tapering and interest rates going up, so there's more going into equity.”

Of the $7.3 trillion in internally managed index assets for the year ended June 30, $939.3 billion was managed in domestic fixed income, a 4.9% increase from the previous year, while $557.7 billion was managed in international and global fixed income, an increase of less than 1%.

State Street Global Advisors also saw similar trends in passive management and global and international equity.

“We've definitely seen a march toward passive among equities,” said Lynn Blake, chief investment officer of global equity beta solutions at SSgA. “In terms of where it's being invested on the equity side, the biggest trend continues to be an interest in global portfolios.”

SSgA's domestic equity indexed assets increased 21.6% to $603.3 billion, while international and global equity assets increased 6.3% to $517.3 billion.

“It continues to be about performance, low cost and transparency,” Ms. Blake said. “Clients look at the performance difference between active and passive and over the most recent periods, passive mangers have outperformed the median.”

In addition to continued interest in global strategies, Ms. Blake said the biggest trend she expects to see in the upcoming year is the growth of smart or advanced beta strategies, which she describes as a “real game changer.”

Rounding out the top five for the largest managers of indexed assets were Malvern, Pa.-based Vanguard Group Inc. with $1.564 trillion, a 26% increase from the previous year; Chicago-based Northern Trust Global Investments with $386.5 billion, up 20.3%; and New York-based Bank of New York Mellon with $287.5 billion, a 28.5% gain.

Meanwhile, U.S. institutional tax-exempt indexed assets increased 18% to $2.712 trillion as of June 30. BlackRock led the group with $664.1 billion in tax-exempt assets, a 17.2% increase, followed by SSgA with $611.2 billion, a 24.4% increase.

In enhanced index management, U.S. institutional tax-exempt assets increased slightly to $161.2 billion, a 2.9% increase, and was once again led by Prudential Financial with $29.4 billion, the same amount as the previous year.