John Delaney, senior director of investments and a portfolio manager at Willis Towers Watson, was not surprised that Vanguard surpassed BlackRock.
While both organizations obviously have significant capability when it comes to managing passive assets, Vanguard as a general rule has a bit more of a "familiar presence with more retail-oriented investors" than BlackRock does, Delaney said. That may give Vanguard "a slight edge as we move into a world where retail investors become a larger and larger portion of the pie in the investment world," he said.
"Corporate pension plans are, generally speaking, getting smaller, and (they) have been a sizable institutional asset owner for a long time," Delaney said. "So inevitably as you get sort of one huge part of the pie getting smaller, another part of the pie gets larger, and retail investors have become an increasingly larger part of the overall, let's call it, asset owner universe."
WTW provides advice as well as outsourced chief investment officer solutions to asset owners across the globe, Delaney said, adding that its clients include corporate defined benefit and defined contribution plans as well as endowments and foundations.
In a continuation of a trend seen last year, asset owners concerned about concentration risk in equity indexes are taking a harder look at their passive equity exposures and showing increased interest in active equity strategies, he said.
"I think my comments from last year are still fairly accurate in terms of the level of concentration risk in equity indices across the globe," Delaney said.
In particular, the so-called Magnificent Seven — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms — currently "are responsible for a large portion of the market cap of the various … large developed public equity indices," he said.
WTW has engaged in "exploratory conversations" with clients interested in active strategies as a way to supplement existing passive equity exposures or to ensure that their portfolios have appropriately sized risk exposure to that level of concentration in equity indexes, Delaney said.
"So, we have seen those discussions and interest in active strategies continue as a trend from last year," he said.
When WTW looks at data for its client base, full-year 2022 data showed an increase in the level of manager search activity related to active management compared with 2021 and 2020, Delaney said. While the firm obviously doesn't have full-year 2023 data yet, "anecdotally, the trend has continued towards active," he said.
Increased volatility tends to lead investors to look toward actively managed strategies, Delaney said.
"When the S&P 500 is going up 20% every year, (there is) not a whole lot of need for active management to be frank," he said. "So, when we have more volatility, I think it gets asset owners thinking more about their actively managed exposure and where they think there is potential value-add in the space, which leads to potentially some flows from passive to active."
Looking ahead, Delaney expects to see "a lot of advancements in the types of products that are being offered to investors in the index space and particularly in the ETF space."
"I think that's an area that is ripe for investment and innovation," he said.
For example, Delaney sees room for growth in passive products that use custom-created indexes to give clients a cost-effective way to manage things like concentration risk.
Worldwide custom index assets totaled $989.6 billion as of June 30, up 21% from June 30, 2022, and up 55% from two years earlier, P&I's survey showed.