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Passive investing taking stronghold across global retirement plans – survey

Passive investing has become mainstream for most retirement plans globally, said the results of a survey by CREATE-Research, a global investment management research firm.

Some 66% of investors see passively managed strategies as "a mature part of their portfolio," with 16% still in the awareness-raising phase, according to the survey.

Among the rest, 15% are in the implementation phase, while the remaining 3% are close to deciding on passive investments. Passive investments have been implemented via three vehicles: traditional index funds, used by 48% of respondents; separate accounts, by 38%; and exchange-traded funds, by 23%.

CREATE-Research surveyed 153 retirement plans in 25 countries with total assets of €3 trillion ($3.53 trillion) and an average of 32% of plan assets in passive investments. Eighty percent of respondents expect to grow their passive investments in the next three years, including 31% that project increasing by more than 5%.

Some 82% of respondents have passive equities in their portfolios; fixed income, 54%; multiasset funds, 20%; commodities, 13%; and real assets, 7%.

The report asserts that two major factors are driving passive investing among global institutional investors. The first is that, over the past decade, passively managed mandates are on average delivering superior returns net of fees compared with actively managed investments. The second is that passive management is experiencing "a strong boost from dramatic upheavals in the investment landscape over the past 18 years." These upheavals include riskier investments failing to generate returns, actual returns diverging significantly from expected returns and diversification failing when it was needed the most.

However, investors still do see drawbacks. Sixty-eight percent of respondents see passive investing as "buying yesterday's winners and overinflating valuations." Meanwhile, 52% report that passively managed investments could destabilize markets and undermine the very diversification they promise. "Furthermore, stocks in broader indices like the S&P 500 have ended up with an aggregate weight in pension portfolios far in excess of the one recorded in the index, as the same stocks get replicated by various ETFs that are also in the same portfolio," the report said. Plus, 42% report that passive investments make booms and busts more likely due to their strong price momentum in both directions.

Other key findings from the survey include:

  • 58% of respondents believe that passive managers reshaping the investment universe as fees become the "North Star" of investing.
  • 60% said the rise of passive investing is a foundational change in the way pension plans now manage their portfolios, blending active and passive management, knowing that both are needed.
  • Nearly half (48%) think passive investments are not only becoming a core asset class, but are also being used to access specialist asset classes, secular investment themes and cyclical risk factors.
  • More than half (54%) say that passively managed investments have benefited from the loose monetary policies of central banks, which have required active managers to "up their game."
  • 42% of respondents said the unwinding of central bank policies is expected to have some effect on passive investing, more likely a slowdown in growth than a sharp reversal in their inflows.