Pension schemes losing millions in active funds

Passive funds are not only cheaper than active funds but also perform better on average, net of costs

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Pension schemes losing millions in active funds

Research from Charles Stanley Pan Asset (CSPA), a specialist fiduciary and multi-asset investment manager, has found that a passive strategy could give large pension schemes an additional £3.8m return per year.

It revealed that over five years to the end of April 2014, passive funds in 14 liquid asset classes have outperformed median active funds by 4.73% on average.

Indeed, in one instance, Emerging Market Bonds, this difference was 12% over the five year period.

The same analysis to the end of June 2013 produced an outperformance of 6.5%. This additional revenue has been coined the ‘Passive Fund Premium’, which is the return to be expected from a portfolio of passive funds over an equivalent portfolio of active funds.

In 2013, CSPA published ‘The Governance Revolution’, which proposed that UK institutional pension schemes, particularly smaller schemes with around £50m of assets, should consider adopting a 100% passive approach, and in doing so could save £3m over five years.

Research findings

This latest research, ‘The Case for a Passive Fund Premium’ focuses on the benefits for larger pension schemes around £500m. CSPA’s findings suggest that if a scheme of this size adopt a passive-only approach to all liquid asset classes, it could save approximately £3.8m per year (net of costs), worth £19m over five years.

Bob Campion, head of institutional business at Charles Stanley Pan Asset, said: “Our latest research provides further support for the argument that passive funds tend to outperform their active counterparts, net of fees, particularly over longer time periods.

“We have found that this is true for larger institutional pension schemes just as it is for smaller schemes.

“By taking a passive approach to investing in all asset classes, pension funds simplify their investment process, cut costs and should find long-term performance improves. It also puts them in a better position to focus on the investment decision that matters most – asset allocation.”

Passive Equity Release

Fund managers who use an active investment approach aim to either outperform a given equity or bond market, often represented by an index, or they aim to achieve a specific investment objective.

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
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