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.
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“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.