Disillusioned with active management, more and more plan sponsors are running the other way. They’re taking a passive stance in their portfolios as they ride out the vagaries of equity and fixed income markets.
Probably the boldest move of late has come from officials with the US$460-million Montgomery County Pennsylvania pension fund, which announced plans to shift 90% of its assets to index funds bought from Vanguard. Why? It’s about the costs — the plan will now be paying roughly 0.13% of its pension assets in investment fees instead of 0.43% to its former mix of active and passive managers. The money saved on fees will put the pension fund that much ahead in generating returns to meet its liabilities.
While Montgomery County has made the boldest move so far in the U.S. pension space, others have voiced their concerns that active management isn’t cutting it — notably, the $260-billion California Public Employees’ Retirement System earlier this year expressed its lack of faith in active management and announced a complete review of its investment beliefs, including a possible (and monumental) shift to a passive investment approach.
That’s in the U.S. What about Canada?
Apparently, the shift is coming. Earlier this month, Greenwich Associates put out its survey of institutional use of exchange-traded funds (ETFs) and found that Canadian institutional investors — including pension funds and insurance companies—are making more and more use of passive products such as ETFs. Moreover, they’re broadening their use — it’s not just about boring old tactical stuff anymore. ETFs are now officially making it into the core—and they’re becoming increasingly common in different asset classes, not just equities.
Increasingly, large Canadian investors are tapping passive ETF products for allocations to both domestic and international fixed income, real estate (think real estate investment trusts) and commodities.
So the ETF conversation is definitely underway in the pension space as passive investment gains a foothold in portfolios. ETFs are front and centre, and as providers gain more insight into how and why pension funds are using them, they’ll need to focus on coming up with pension-friendly products and services that make them that much easier for plan sponsors to get excited about.
This article originally appeared on benefitscanada.com.