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The Pull of Active
Management
Examining the Use of Active vs. Passive
Strategies in the Institutional Marketplace
April 2016
Table of Contents
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–5
Usage of Active vs. Passive Strategies
Allocation to Active vs. Passive Strategies
Institutions Shunning Passive Management
Strategic Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
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Publication date: April 2016
Introduction
Pressure is mounting on institutional investors to support their organizations with a balance of
risk management and growth, fueling interest in asset classes with a higher return potential in
addition to the more traditional areas of focus. Many institutional consultants are encouraging
clients to focus on alpha as a way to add value to their portfolios, given that most market
predictions for 2016 are lackluster at best.
Overall, institutional investors appear to be heeding the call and have their sights set on active
management for the near future. Yet allocation to actively-managed strategies declines as
asset size grows, with the largest institutions clearly preferring less traditional asset classes
such as private equity, real assets/commodities, real estate/REITs and alternatives.
This research paper examines trends in the usage of and allocation to active and passive
strategies among institutional investors over the past three years. Specifically, we analyze the
asset allocation practices of defined-benefit (DB) pensions (corporate pensions as well as
public and Taft-Hartley plans) and non-profits (endowments, foundations and other tax-exempt
organizations—TEO,) by organization type as well as by asset size. We begin with an
assessment of the proportion of institutional investors that are using active and passive
strategies. We then turn to an analysis of asset allocation, providing a view of the percentage
of assets institutional investors are directing to active vs. passive investments. We conclude
by taking a look at the proportion of institutional investors that are shunning passive management
altogether in favor of active management, private equity and alternative strategies.
SOURCE: US INSTITUTIONAL INVESTOR BRANDSCAPE®. JANUARY 2016. 1
Definitions:
The “Active” category includes:
The “Passive” category includes:
The “Other” category includes:
•
•
•
•
•
•
•
•
•
•
•
•
•
US public equities (actively-managed)
US fixed income (actively-managed)
International public equities
(actively-managed)
International fixed income (activelymanaged)
Key Findings
Usage of Active vs. Passive
Strategies
Pensions
The vast majority of pension investors, over
nine in ten (95%), incorporate actively-managed
strategies in their institutional portfolios. In fact,
use of active management varies little by asset
size, ranging from 93% among pensions
managing $250 million to less than $1 billion in
assets to 100% of the $1 billion-plus pensions.
By category, 90% of corporate pensions report
using actively-managed strategies, compared
with 100% of their public defined-benefit and
Taft-Hartley pension peers.
The story is quite different for passivelymanaged strategies, for which 68% of
pensions report to be using, down from 81%
in 2014. Notably, use of passive investments
is lowest among the smallest-pension cohort,
as just 54% of pensions managing less than
$100 million in assets invest in passive
instruments. Conversely, pensions managing
larger asset pools are much more likely to be
allocating at least a portion of their assets to
passive strategies (90% of pensions managing
$250 million to just under $1 billion in assets
and 82% of $1 billion-plus pensions).
•
US public equities (passively-managed)
US fixed income (passively-managed)
International public equities (passivelymanaged)
International fixed income (passivelymanaged)
Corporate pensions appear to be driving the
decrease in use of passive investments,
perhaps a reflection of the reliance on liabilitydriven investment (LDI) strategies among this
cohort of the pension market.
Finally, the proportion of pensions using other
asset classes that cannot be accurately
categorized as either active or passive and has
remained relatively consistent year over year.
One exception is corporate pensions, which
have decreased their use of private equity and
cash. EXHIBIT 1
Private equity
Cash/cash equivalents
Real assets/commodities
Real estate (including REITs)
Other alternatives
Any other asset categories
compared with 2013, and are the only
segment of the non-profit market to have
boosted their use of passive management
over the past three years.
The use of other asset classes is more
prevalent among non-profits (88%) than
among pensions (78%) and is noticeably
higher among the $1 billion-plus segment. In
addition, 95% of foundations incorporate these
asset classes in their portfolios—higher than
any other type of institution. EXHIBIT 2
Non-Profits
Nearly nine in ten (89%) non-profits overall
utilize actively-managed strategies, a proportion
that increases with the size of the asset pool.
Virtually all non-profits managing $250 million
or more in assets are using active
management, compared with just 85% of their
peers managing less than $100 million.
Endowments report the highest usage level at
93%, while foundations show slightly weaker
interest at 86%.
The use of passive management has
decreased among non-profits overall, and this
decrease appears to be driven by the smaller
institutions managing less than $250 million in
assets. Interestingly, foundations report an
increase in their use of passive strategies
Nearly nine in ten non-profits overall utilize actively-managed
strategies, a proportion that increases with the size of the
asset pool.
2 THE PULL OF ACTIVE MANAGEMENT
EXHIBIT 1
USAGE OF ACTIVE VS. PASSIVE STRATEGIES
PENSIONS BY ASSET SIZE AND CATEGORY
EXHIBIT 1
USAGE OF ACTIVE VS. PASSIVE STRATEGIES
Pensions by Asset Size and Category
$20M–
<$100M
$100M–
<$250M
$250M–
<$1B
$1B+
Corporate
DB
Public DB &
Taft-Hartley
Active
95%
94%
98%
93%
100%
90%
100%
Passive
68%▼‘14
54%
64%
90%
82%
67% ▼‘14
73%
73%
73%
83%
91%
75% ▼‘14
83%
Other
78%▼‘14
Low
Key
High
≤ 63%
64%
to
72%
73%
to
82%
83%
to
91%
≥92%
/= Significant change from stated year
/= Significant change observed in 2014 sustained in 2015
Base: All pensions
Source: Market Strategies International. Cogent Reports™. US Institutional Investor Brandscape®. January 2016.
EXHIBIT 2
USAGE
OF ACTIVE VS. PASSIVE STRATEGIES
EXHIBIT 2
NON-PROFITS
BYcash/cash
ASSETequivalents,
SIZE AND
CATEGORY
* Other
includes
private
real assets,
real estate, other alternatives, and any other asset categories
USAGE
OFequity,
ACTIVE
VS. PASSIVE STRATEGIES
Q11A. What proportions of your [category] assets are allocated across each of the following asset categories?
▲/▼ = Significant change from stated year
/ = Significant change observed in 2014 sustained in 2015
Base: All Pensions
$20M–
$100M–
$250M–
Non-Profits by Asset Size and Category
Active
89%
Passive
59%▼‘14
Other
88%▼‘14
<$100M
<$250M
85%
95%
<$1B
$1B+
99%
Endowment Foundation
TEO
100%
93%
86%
89%
56%▼‘14 63%▼‘14 66%
67%
63%
75%▲‘13
48%
88%
97%
95%
85%
84%
90%
85%
▼‘14‘13
Low
Key
High
≤ 58%
59%
to
69%
70%
to
79%
80%
to
90%
≥91%
/= Significant change from stated year
/= Significant change observed in 2014 sustained in 2015
Base: All non-profits
Source: Market Strategies International. Cogent Reports™. US Institutional Investor Brandscape®. January 2016.
*Other includes private equity, cash/cash equivalents, real assets, real estate, other alternatives, and any other asset categories
Q11A. What proportions of your [category] assets are allocated across each of the following asset categories?
▲/▼ = Significant change from stated year
/ = Significant change observed in 2014 sustained in 2015
Base: All Non-Profits
SOURCE: US INSTITUTIONAL INVESTOR BRANDSCAPE®. JANUARY 2016. 3
Allocation to Active vs.
Passive Strategies
their assets with active managers and allocate
31% of assets to other (non-passive) asset
classes, while their non-profit counterparts
direct just 44% to active strategies and hold
41% of their assets in categories outside of
traditional active and passive management.
The proportion of institutional assets allocated
to actively-managed strategies declines by
asset size, with the largest institutions clearly
preferring less traditional asset classes
including private equity, real assets/
commodities, real estate/REITs and alternatives.
The $1 billion-plus pensions have just 51% of
are passively-managed, along with one-quarter
of the assets held by smaller pensions and
non-profits.
Corporate pensions report greater use of
passive management than do their public DB
and Taft-Hartley peers (29% compared with
20%), while roughly one-quarter of endowment,
foundation and tax-exempt assets are passively
managed. EXHIBITS 3 & 4
Institutions managing less than $1 billion in
assets continue to prefer active management.
That said, one-third of assets held by pensions
managing $250 million to less than $1 billion
EXHIBIT 3
ASSET ALLOCATION:
PROPORTION OF ACTIVE VS. PASSIVE
EXHIBIT 3
PENSIONS BY ASSET SIZE AND CATEGORY
ASSET ALLOCATION: PROPORTION OF ACTIVE VS. PASSIVE
Pensions by Asset Size and Category
Other
$20M–
<$100M
$100M–
<$250M
11%
11%
24%
25%
$250M–
<$1B
13%
$1B+
31%
33%
Corp.
DB
Public DB &
Taft-Hartley
11%▼‘14
17%
29%
20%
60%
63%
19%
Passive
65%
63%
Active
54%
51%
/= Significant change from stated year
/= Significant change observed in 2014 sustained in 2015
Base: All pensions
Source: Market Strategies International. Cogent Reports™. US Institutional Investor Brandscape®. January 2016.
EXHIBIT 4
ASSET ALLOCATION:
PROPORTION OF ACTIVE VS. PASSIVE
EXHIBIT 4
NON-PROFITS BY ASSET SIZE AND CATEGORY
ASSET ALLOCATION: PROPORTION OF ACTIVE VS. PASSIVE
Non-Profits by Asset Size and Category
Q11A. What proportions of your [category] assets are allocated across each of the following asset categories?
▲/▼ = Significant change from stated year
/ = Significant change observed in 2014
sustained in$100M–
2015
$20M–
$250M–
EndowBase: All Pensions
<$100M
<$250M
<$1B
$1B+
Foundation
TEO
25%
27%
21%
23%
25%
52%
49%
ment
Other
23%
20%
27%
▼‘13
25%
23%
41%
18%
▼‘13
23%
15%
Passive
52%
Active
57%
55%
44%
/= Significant change from stated year
/= Significant change observed in 2014 sustained in 2015
Base: All non-profits
Source: Market Strategies International. Cogent Reports™. US Institutional Investor Brandscape®. January 2016.
4 THE PULL OF ACTIVE MANAGEMENT
56%
Institutions Shunning
Passive Management
category, compared with just 18% of $1
billion-plus pensions and 33% of the largest
non-profits. In addition, the proportion of
institutions shunning passive management
fluctuates substantially year over year in the
smaller end of the market, while the larger
institutions appear to be more steadfast in their
convictions and are less likely to make dramatic
shifts in their asset allocation strategies.
An analysis of the proportion of institutions that
hold 100% of their assets in actively-managed
and “other” strategies, and consequently are
directing 0% of their assets to passive
investments, further emphasizes the popularity
of active management in the smaller end of the
market. More than 4 in 10 institutions managing
less than $100 million in assets (46% of
pensions and 44% of non-profits) fall into this
driven by corporate defined-benefit plans in
the pension market and tax-exempt
organizations in the non-profit space. As noted
earlier, corporate pensions are increasingly
dependent on LDI, which may be effectively
shifting their allocation to active management.
Meanwhile, tax-exempt organizations are
expressing the need for higher returns and
diversification opportunities, which may explain
the shift away from passive management in
this segment of the institutional market.
EXHIBITS 5 & 6
A view by organization type shows that the
drive away from passive management is being
EXHIBIT 5
PROPORTION WITH 0% OF ASSETS ALLOCATED TO PASSIVE STRATEGIES
EXHIBIT 5BY ASSET SIZE AND CATEGORY
PENSIONS
PROPORTION WITH 0% OF ASSETS ALLOCATED TO PASSIVE STRATEGIES
Pensions by Asset Size and Category
Total
$20M–
<$100M
$100M–
<$250M
$250M–
<$1B
$1B+
Corporate
DB
Public DB &
Taft-Hartley
2015
31%▲‘14
46%
36%
10%
18%
33%▲‘14
27%
2014
19%
15%
29%
21%
8%
17%
16%
2013
38%
43%
47%
41%
27%
28%
42%
/= Significant change from stated year
/= Significant change observed in 2014 sustained in 2015
Base: All pensions
Source: Market Strategies International. Cogent Reports™. US Institutional Investor Brandscape®. January 2016.
EXHIBIT 6
PROPORTION WITH 0% OF ASSETS ALLOCATED TO PASSIVE STRATEGIES
EXHIBIT 6BY ASSET SIZE AND CATEGORY
NON-PROFITS
PROPORTION WITH 0% OF ASSETS ALLOCATED TO PASSIVE STRATEGIES
Non-Profits by Asset Size and Category
Total
$20M–
<$100M
$100M–
<$250M
$250M–
<$1B
$1B+
Endowment
▲‘14
41%
44%▲‘14
34%each of the
33%
2015
37%
Q11A. What
proportions
of▲‘14
your [category]
assets37%
are allocated
across
following asset categories?
▲/▼ = Significant change from stated year
/ = Significant change observed in 2014 sustained in 2015
15%
11%
17%
35%
36%
Base: All Pensions
2014
24%
2013
44%
48%
39%
43%
42%
37%
Foundation
TEO
25%▼‘13
52%▲‘14
16%
11%
50%
45%
/= Significant change from stated year
/= Significant change observed in 2014 sustained in 2015
Base: All non-profits
Source: Market Strategies International. Cogent Reports™. US Institutional Investor Brandscape®. January 2016.
SOURCE: US INSTITUTIONAL INVESTOR BRANDSCAPE®. JANUARY 2016. 5
Strategic
Implications
The allocation of institutional assets across
asset classes and product types has
remained fairly stable over the past year,
with smaller institutions concentrating their
assets in US equities and US fixed income
and larger organizations employing a more
diversified approach. Yet, as US institutional
investors are challenged to support their
organizational obligations with the appropriate
balance of risk management and return, we
are seeing increased interest in investing in
asset classes with a higher return potential,
such as private equity, real estate and
alternatives.
Overall, institutional investors appear to
have their sights set on active management
for the near future, but allocation to activelymanaged strategies declines as asset size
grows, suggesting positive growth potential
for passive management over the longer term.
In addition to a solid understanding of asset
allocation trends and behaviors, the factors
driving anticipated asset allocation changes
are critical for asset managers to appreciate
in order to effectively position their capabilities
to meet the needs of their target market.
The focus of pensions is clearly on de-risking,
although this aspect declines slightly in
importance as asset size grows. Pensions,
particularly the smallest organizations, report
a near-equal focus on seeking higher
returns, which may explain their interest in
private equity and alternatives.
The $1 billion-plus pensions are more likely
than their smaller-asset peers to point to
the need of increasing diversification,
suggesting these institutional investors feel
the need to monitor their exposure particularly
within the fixed income category. In contrast,
non-profits of all asset sizes continue to
strive for higher returns and further
diversification.
For asset managers serving the institutional
market, the need for focus has never been
greater. Determining the right business
strategy, product offering and competitive
positioning is to a great extent dictated by
the segment of the market being targeted.
Insights shared in this white paper are derived from our US Institutional
Investor Brandscape® report. The full report examines the behaviors and
attitudes of senior investment professionals across defined-benefit
pension plans, and private and public foundations and endowments.
Conducted since 2010, this study covers overall trends in asset
allocation and investment strategies, the variables that lead to selection,
and the current state of brand equity, differentiation and loyalty in this
critical market.
6 THE PULL OF ACTIVE MANAGEMENT
Methodology
Cogent Reports conducted an online survey of a representative cross section of 405 investors managing
$20 million or more in institutional investable assets from October 1 to December 10, 2015. Survey
participants were required to play a direct role in the evaluation and selection of investments or asset
managers within their organizations.
Linda York
Senior Vice President, Syndicated Research & Consulting
For more information, contact us at
[email protected]
or 617.441.9944
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