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Alternative Market Briefing

It’s all about size in the active/passive pension investment debate

Wednesday, October 23, 2013

Beverly Chandler, Opalesque London:

Research paper The Governance Revolution from Evercore Pan-Asset (EPA) finds that passive investment funds cost less than active ones, and perform better over most time periods. The paper analysed 14 equity, bond and alternative asset classes, revealing that passive funds performed better than the median actively-managed fund in all but one case over the past five years.

This performance was repeated over three years, where passive funds performed better in 12 out of the 14 asset classes. Across all asset classes, on average, passive funds out-performed active funds by 6.5% over five years. For a £50m ($80m) pension scheme, this under performance would mean that an entirely passive portfolio would save £3.6m ($5.8m) compared with a portfolio of median active managers over five years.

Scale was crucial with EPA recommending that smaller UK defined benefit pension schemes with less than £250m in assets, should consider adopting a 100% passive approach, using the time and cost savings this generates to focus greater attention on asset allocation.

In terms of exposure to hedge funds, EPA commented: "It is possible to invest passively in hedge funds through hedge fund ETFs, but there are few options. Some vehicles are not 'passive’ in any normal sense, as they do not track an independent index. For la......................

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