Institutional investors lean into active management, despite trend toward passive

A Cerulli report shows how the so-called smart money is generally increasing exposure to active strategies.

Amid all the hoopla over the flow of assets into passive indexed strategies and out of more costly, actively managed mutual funds, the foundational appeal of active management is being overlooked, according to Cerulli Associates.

Despite a steadily narrowing gap between the amount of money in active and passive strategies, Cerulli’s research shows active management has a growing attraction that might have something to do with the rockier outlook for the financial markets.

Five out of six categories of institutional investors are on track to increase their portfolio allocations to active equity strategies over the next two years, and four of six are planning an increase to active strategies on the fixed-income side, the research shows.

On the equity side, the insurance company category is boosting active exposure to 62% from 59%, nonprofits are increasing it by a percentage point to 52%, corporate defined-benefit plans are also adding a percentage point to 49%, the health care category is increasing it by two points to 52%, and Taft-Hartley plans are increasing it by seven points to 47%.

The lone outlier is public defined-benefit plans, which plan to decrease their exposure to active equity by one percentage point, to 52%.

On the fixed-income side, insurance companies are increasing exposure to active management by two percentage points to 61%, public defined-benefit plans are adding two points to 56%, the health care category is adding three points, to get to 53%, and Taft-Hartley plans are adding two points, to 41%.

Meanwhile, nonprofits plan to trim active fixed income by four points to 49%, and corporate defined-benefit plans are cutting eight percentage points to get down to 54%.

It’s not uncommon for active management to gain appeal during periods of market volatility, but even with the general ebb and flow of market cycles, active management has been experiencing a shrinking share of the overall pie.

The decline in the gap between active and passive management is illustrated by Morningstar data showing active strategies with $1.17 trillion more in assets than passive strategies at the end of 2022. That compares to a gap of $1.77 trillion just six months earlier, and a $2.95 trillion gap in 2021.

“While the outlook for active investment strategies may look bleak, there are indications that institutional investors will continue to provide a strong market for active investments,” said Chris Swansey, author of the Cerulli report.

Of those institutional investors planning to increase allocations to active equity strategies, 32% plan to increase exposure to U.S. stocks, followed by global stocks at 21%, and emerging markets equity at 18%.

On the fixed-income side, 13% of institutional investors will be increasing their exposure to U.S. investment-grade debt, followed by U.S. high-yield debt and bank loans at 10% each.

“It remains to be seen whether active funds can recoup some of the flows they have lost over the last 10 years in a significantly new market environment,” Swansey said. “For now, at least, institutional investors have signaled that they will continue to provide a backstop to active fund flows.”