Defined contribution investors were selective in how they pursued passive and active investing strategies — adding to passively managed equity and actively managed fixed income while subtracting from actively managed equity and passively managed fixed income.
The results of the latest Pensions & Investments annual survey of DC money managers essentially matches the experiences of some industry members who said fees played a key role in passive equity assets rising in 2015. Low interest rates contributed to more fixed-income assets going to actively managed options, they said.
“Sponsors are implementing more streamlined lineups with a focus on lower-cost options, particularly passive equity,” said Russell Ivinjack, a senior partner at Aon Hewitt Investment Consulting, Chicago.
As for fixed-income investing, “everyone is anticipating a rising interest rate environment,” he said. Sponsors are counting on actively managed investments to outperform passive ones and on actively managed portfolios to provide more diversification than passive ones, he added.
Overall DC assets slipped 1.1% to $5.48 trillion as of year-end 2015; internally managed assets declined 0.9% to $4.79 trillion. P&I measures U.S. institutional, tax-exempt assets as of Dec. 31; 244 defined contribution managers were in the 2015 survey, down from 251 the year earlier.
Among equity categories tracked by P&I, active domestic equity assets fell 3.3% to $1.34 trillion, and assets in active international equity dropped 2.2% to $393 billion. Meanwhile, assets in passive domestic equity rose 3.9% to $1.1 trillion, while passive international equity assets jumped 28.2% to $206.9 billion.
“We definitely see a trend toward passive equity mandates,” said David O'Meara, a New York-based senior investment consultant for Willis Towers Watson PLC. “More clients are tilting toward passive equity in defined contribution and defined benefit plans.”
For DC plans, “increased sensitivity” to fees is motivating a greater use of those strategies, he said.
Although Russell Investments “leans toward” passive strategies for equity investing, the company recommends a mixture of passive and active approaches depending on equity subcategories, said Holly Verdeyen, the firm's Chicago-based director of defined contribution investments. “Don't make decisions just on low fees,” she said.
Still, Ms. Verdeyen forecast greater sponsor interest in passive equity due to “a continuing sensitivity to fees” and a fear of ERISA fiduciary-breach lawsuits.
The hybrid approach of mixing active and passive strategies for equity investing was endorsed by Ronald Cohen, the Boston-based head of DCIO and RIA Sales for Wells Fargo Funds. “Add more passive equity where it makes sense,” said Mr. Cohen, noting large-cap domestic equity is a good candidate for passive investing.
He predicted plan sponsors will “continue to push” for passive equity as well as for all forms of target-date fund options this year.
