Indexed assets under management remained largely unchanged during the year ended June 30, falling slightly to $9.86 trillion from $9.87 trillion the previous year, according to Pensions & Investments' annual survey of managers of indexed assets.
Although the year-over-year change in total assets was slight, Jane Welsh, senior investment consultant, manager research, and head of the indexation research team at Willis Towers Watson PLC in London, pointed to increases in passively managed fixed income as a notable development in 2016.
“We've seen growth in passive fixed income over the past year. Some of that may be market moves and pension funds may be switching out of equities into fixed income as they mature,” Ms. Welsh said.
Domestic fixed-income assets under indexed management saw the largest percentage increase in growth for the year, rising 12.9% to $1.34 trillion, and global/international fixed income increased 4.7% to $830.7 billion.
The Barclays U.S. Aggregate Bond index returned 6% for the year ended June 30, while the Barclays Global Aggregate ex-U.S. Bond index returned 8.12% for the period.
Equities continued to hold the highest share of passively managed assets in 2016. For the year ended June 30, $4.45 trillion was managed in U.S. equity, a slight decrease from the previous year's $4.47 trillion, while assets managed in international equity posted a larger decline of 9.2%, to $1.9 trillion. The $1 trillion managed in global equity was down 4.1% from the previous year.
For the one-year period ended June 30, the S&P 500 index returned 1.73%; the MSCI All Country World index, -5.72%; and the MSCI All Country World index ex-U.S., -12.68%.
In addition to market performance, Ms. Welsh also noted the impact of other economic conditions on indexed assets under management.
“We've got issues like the sovereign wealth funds pulling assets out of investments. Without the oil revenues coming in, they've had to sell some of their reserve assets and a lot of that money is passively managed,” Ms. Welsh said.
Assets managed in indexed strategies for sovereign wealth funds decreased 25.1% to $272.3 billion, while assets managed for central banks saw a 36% drop in the year ended June 30, falling to $146.9 billion.
Passively managed assets in exchange-traded funds/exchange-traded notes increased 9.4% in 2016 to $2.34 trillion.
Ms. Welsh said institutional investors find the liquidity and low cost of ETFs/ETNs tactically useful for short-term exposure to particular markets, as transition vehicles when changing managers or as a way to “get exposure to niche strategies where there isn't a traditional strategy available.” Ms. Welsh cited passive high yield as one example of this type of niche strategy.
U.S. institutional tax-exempt investors had $2.02 trillion in passive domestic equity, a 1.3% increase over the previous year; $580.8 billion in domestic fixed income, an 8.2% increase; a 5.1% decrease in international equity to $370.6 billion; a 3.5% decrease to $311.1 billion in global equity; and $18.3 billion in global/international fixed income as of June 30, a 4.3% increase.
Passively managed defined benefit plan assets declined 7.6% in 2016 to $1.01 trillion, while defined contribution assets increased 7% to $1.73 trillion.
As in previous years, the majority of active managers in most categories underperformed their relative indexes during the year ended June 30.
According to the midyear “S&P Indices vs. Active Funds U.S. Scorecard,” published by S&P Dow Jones Indices, 84.62% of active large-cap managers failed to outperform the S&P 500; 87.89% of midcap managers underperformed the S&P MidCap 400; and 88.77% of active small-cap managers underperformed the S&P SmallCap 600. The rolling five-year analysis shows 94.58% of active managers across all domestic equity market capitalizations underperformed the S&P Composite 1500 index and 87.47% underperformed the composite index for the 10-year period.
Active emerging markets equity managers had the best results for the year, with only 42.22% of active managers failing to outperform the S&P/IFCI Composite index during the year ended June 30, while 54.92% of active international equity managers underperformed relative to the S&P 700 index and 75.35% of active global equity managers underperformed the S&P Global 1200 index for the year.
As with equities, most active fixed-income managers also underperformed their relative indexes as of June 30.
The SPIVA analysis shows 94.39% of investment-grade long-duration funds underperformed the Barclays Capital Long-Duration Government/Credit index for the year, 93.1% of active long-duration government funds failed to outperform the Barclays Long-Duration Government Bond index, 75% of active high-yield managers underperformed the Barclays High Yield index, and 74.65% of emerging markets fixed-income funds underperformed the Barclays Emerging Markets Debt index.
Absent from this year's list is Pacific Investment Management Co., Newport Beach, Calif., which said it manages approximately $40 billion in equities. A spokesman said PIMCO did not include those strategies in the 2016 survey because most of the assets are not managed in a purely indexed manner as defined by the survey. Last year, PIMCO ranked 14th on P&I's list, with $45.2 billion in indexed assets under management.
