In the latest sign of the apocalypse for active management, the largest pension fund in the United States is mulling a move to an all-passive portfolio.
The California Public Employees Retirement System's investment committee is evaluating whether the fees it pays its active managers are worth it or if paying less fees for passive management will lead to better long-term results, according to sister publication Pensions & Investments.
The pension fund, commonly referred to as CalPERS, oversees about $255 billion in assets, more than half of which already is invested in passive strategies.
The critique of active management is part of a review of the fund's investment beliefs, which began yesterday, P&I said.
At the heart of the review of active management is whether taking the trouble to pick the right managers is worth it.
As P&I reported: “CalPERS investment consultant Allan Emkin told the investment committee that at any given time, around a quarter of external managers will be outperforming their benchmarks, but he said the question is whether those managers that are doing well are canceled out by other managers that are underperforming.”
Active managers have been feeling the pressure from passively managed funds for some time now, especially on the equity side.
Total assets in passive equity mutual funds and exchange-traded funds total more than $2 trillion, up from $534 billion 10 years ago, according to Lipper Inc.
Actively managed equity funds still have about double the assets of their passive counterparts, but investors have shown a clear preference over the past decade.
Since 2003, investors have pulled $287 billion from actively managed equity funds, while investing just over $1 trillion into passive funds.
On the bond side, the inflows are still dominated by active managers but passive fixed-income ETFs have taken off in the past four years.
They have had $260 billion of inflows since the beginning of 2008; from 2003 to 2007 they had $73 billion of inflows, according to Lipper.
The attention paid to passive funds hasn't gone unnoticed by active managers.
OppenheimerFunds Inc. replaced the management team of its value funds this month due to performance issues.
“There's no room for closet indexers in an active-management shop anymore,” Art Steinmetz, OppenheimerFunds' chief investment officer said this month. “We're required to demonstrate we're worth the fees we charge every day.”
BlackRock Inc., the largest provider of ETFs, knows firsthand how tough the competition from passive management can be for its active mutual funds.
“We have to continually find ways to improve by identifying opportunities to enhance performance,” president Robert Kapito said at the Credit Suisse Financial Services Forum on Feb 13, according to Bloomberg News. “I will have less patience going forward with underperforming active products, and we will look to replace those teams quicker than we have replaced them in the past.”
Two weeks later, BlackRock replaced the management teams of three underperforming mutual funds.
CalPERS is expected to decide the fate of its active managers in about five months. At this point, it looks like it could go either way.
Chief operating investment officer Janine Guilot told P&I that 27 preliminary interviews of CalPERS staff members, board members, money managers and external consultants showed a “wide disparity of views” on active management.