Northern Trust: Popularity of Passive Investing Fuels Customized Beta Strategies
(March 6, 2012) — The growing use of passive investing strategies among institutional investors is fueling the popularity of customized indices to meet fund objectives, according to a new survey by Northern Trust.
In the survey, 40% of institutions globally identified customized beta as being relevant to their current portfolio construction models. Meanwhile, 51% said they would be interested in exploring customized indices as a way of addressing their objectives. However, only 22% have evaluated customized beta approaches.
In terms of the popularity of passive investing, worldwide, approximately one third of all institutions surveyed by Northern Trust said passive products makes up more than 40% of their equity and fixed-income assets today. Despite this continued trend toward allocating to index strategies, 63% of all participating institutions said that known inefficiencies should be addressed and removed, with one in five saying they would be willing to pay for this service.
The global survey was conducted of 121 institutional investors, predominantly pension funds, in Europe, Asia and North America, representing more than $500 billion in assets.
The report on the study — titled “Customized Beta: Changing Perspectives on Passive Investing” — investigates the attitudes of institutional investors at a time when turbulence and uncertainty have put a spotlight on risk management. “The research highlights how the increased use of passive investing is leading to a blurring of traditionally-held views on the separation of alpha and beta, as more choices exist for investors within the spectrum of beta,” Northern Trust stated in a release.
“Investors around the world are reframing their thinking about their funds’ objectives, with an overwhelming 84% from our survey saying that meeting their investment objective is more important than outperforming a benchmark,” said John Krieg, managing director, asset management, Europe, Middle East & Africa region, Northern Trust.
Institutional investors surveyed by Northern Trust cited a range of benefits derived from customized beta strategies. While European respondents view such strategies as having the potential to increase transparency, and as an effective screening tool to meet socially responsible investing and environmental, social and governance investment objectives, Asian respondents see customized beta strategies as a way to eliminate methodology- and weighting-based biases from standard indices. Meanwhile, North American respondents consider customized beta strategies as a means of gaining exposure to new markets.
The heightened focus on passive investing was also revealed in a survey conducted last month by Keefe, Bruyette & Woods (KBW). According to the firm — which questioned approximately 42 decisionmakers at corporate and government pension plans, endowments, foundations, and investment managers in order to garner insight into institutional investors’ asset allocation and manager selection process — respondents generally expected to increase their allocations to passive and alternative strategies. In particular, respondents seemed interested in various hedge fund strategies and specialized strategies, such as real estate, energy, and infrastructure.