Passive Investing Hits Plateau

NEPC survey finds passive investing is losing momentum, cites geopolitical uncertainty, market volatility.

Despite several high-profile endowments and foundations vowing to shift more of their assets into passive investment vehicles, and Warren Buffet’s insistence that investors avoid actively managed investments, the trend in passive investing has plateaued, according to a report from investment consulting firm NEPC.

The “Q1 2017 NEPC Endowment and Foundation Poll,” a measure of endowment and foundation views on the economy, investing, and market trends, found that the use of passive management by most investors has stabilized. The survey attributes this to geopolitical uncertainty, and general concerns about the volatility of the market.

“Although many endowments and foundations have incorporated passive management into their portfolios, investors also recognize its limitations,” said Kristin Reynolds, a partner in NEPC’s Endowment and Foundation Practice in a statement. “Passive management offers some compelling attributes, but our survey results indicate that active management still plays a prominent role in investors’ portfolios.”

According to the survey, 39% of respondents have less than 10% of their investments in passively managed vehicles, while 35% of respondents have more than 20% of their portfolios in passively managed investments. Nearly half (49%) reported having no significant change to their use of passive management during the last three years, while 42% have increased their use of passive management at least somewhat during the same period. When asked why they were interested in passive management, respondents cited lower fees (39%) as the main reason, followed by poor performance among actively managed investments (26%), and the inability to identify and hire strong active managers (4%).

Only 7% of those surveyed said they plan to significantly increase their use of passive management over the next 12 months, while just 20% said they plan to increase it modestly. The majority of respondents (51%) said they plan to leave their current exposure to passive management unchanged.

Emerging market equities were cited most often among respondents as the asset class they believe will have the strongest year in 2017, with 39% expecting those investments to outperform all other asset classes. This was followed by domestic equities (23%), and international equities (16%).

Other key findings from the NEPC survey include:

  • Some 57% of respondents think the US economy is in a better place compared to this time last year, a significant increase from 3Q 2016 (32 percentage points) but a slight decrease from 4Q 2016 (7 percentage points).
  • When asked about the greatest threat to their investment performance over the near term, 37% of respondents cited geopolitics and political uncertainty.
  • More than one-third of respondents (34%) cited a slowdown in global growth as the greatest threat, a decrease of 29 percentage points from 3Q 2016. Investors are also significantly less concerned about rising interest rates, global deflation, and potential military conflict than they were in 2016.
  • Nearly two in five respondents (39%) think emerging market equities will be the strongest-performing asset class in 2017, followed by domestic equities (23%), and international equities (16%).


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