Institutions Favor Passive Investments

Terry Flanagan

Large asset managers are favoring passive vehicles such as ETFs and mutual funds to gain access to active portfolio management strategies such as managed futures.

“In the past, alternative investment strategies were limited to certain high net worth investors and institutions,” said Ryan Issakainen, senior vice president, exchange-traded fund strategist for First Trust Advisors. “There are a growing number of mutual funds and exchange-traded funds (ETFs) that have opened the door for a broad range of investors to gain exposure to these strategies.”

“Asset owners are moving more toward passive investments and ETF providers,” said Rod Jones, North American head of business at Stoxx Ltd. “One of the major trends is having a broader mix of traditional active managers, and smart beta. Smart beta is an index that gives a certain type of exposure that you would see in more of an active strategy.”

An example is the Stoxx U.S. Minimum Variance Index, “which instead of giving you a standard cap-weighted exposure, it’s giving you exposure to the low volatility anomaly, which says that in equity markets, the low volatility stocks tend to outperform the high volatility, which turns the capital asset pricing model on its head,” said Jones.

Another example is the recently launched Stoxx Strong Quality Index, which functions as a benchmark for actively managed funds that share the same investment philosophy.

“Strong Quality takes a simple investment strategy that you would see from an investor focused on strong quality growth companies, and we’re mixing in a value price, and it ends up looking like a Buffett-type investment approach” Jones said. “Asset owners are asking if this is a replacement for managers. Index products tend to be less expensive than paying an active manager and performance tends to be more persistent. Plan sponsors are conducting internal studies about replacing active strategies with these beta-type of strategies. That is a clear trend. For a lot of these strategies can be replicated in an index.”

Alternative investments can also be packaged in an index that makes them more attractive to institutions.

“Managed futures ETFs address many of the critiques that have sometimes been leveled at traditional managed futures accounts,” said Issakainen. “While traditional managed futures accounts are largely opaque, managed futures ETFs are generally more transparent, allowing investors to better understand what they own and how their funds are being managed.”

The Stoxx Efficient Capital Managed Futures Index provides access to 20 of the largest managed futures managers.

“If you are just doing it through an index, you could replicate one strategy, but we chose to do an index of actual managers,” Jones said. “It’s a sensible way to provide that exposure. Even for investment managers who have clients that want them to manage all their money, and they don’t have a managed futures benchmark, this gives them the ability to get access to the largest managed futures mangers passively.”

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