UK pension schemes are lagging behind their European counterparts investing in smart beta strategies, according to research that adds to criticism of actively managed investments.
The debate about passive and active management has intensified after the UK government suggested the listed investments of the local authority schemes in England and Wales be combined in a passive collective investment vehicle, which could result in £420m of savings.
The report on passive management – by consultancy Create and asset manager Amundi – predicted European schemes will double their passive allocations to 40 per cent by 2020. Much of these allocations will be made up of vehicles such as smart beta strategies and exchange traded funds.
First and foremost get your asset strategy right. If it isn’t, the nuances between active and passive are secondary
Tim Giles, Aon Hewitt
“[On] the continent there is bigger interest in smart beta strategies,” said Professor Amin Rajan, chief executive of consultancy Create. “The UK has long been used to cap-weighted indices – it has a lot to do with habit and tradition."
European has led the way on smart beta strategies, with research this year by asset manager Russell Investments finding 40 per cent of asset owners were using smart beta, compared with 24 per cent in North America.
Jamie Forbes, director at Russell Investments, said research conducted by the investment manager “did find UK investors were perhaps less far along the path than European ones".
Forbes argued that other European investors had largely invested through segregated mandates, whereas UK investors favoured pooled funds, which required more product development from providers.
Rajan said the drive towards passive was largely due to schemes lacking the governance and skillsets to get good value from active management, which drove them towards low-cost, commoditised investments.
“They find it very difficult to go into anything risky… It is not that they don’t want active,” he said. “Active hasn’t failed. Those that know how to use it are getting good returns.”
Tim Giles, partner at consultancy Aon Hewitt, said the case for active management was still strong for those with the right governance, adding the choice between active and passive was not “binary”.
“There will be a shift from active to passive, but there will [also] be a change in the way things are managed,” he said. “People do need to be careful in terms of making sure they’re getting the exposure at the right price.”
He warned against schemes favouring specific products or strategies because they are seen as cheap or low-governance. “First and foremost get your asset strategy right. If it isn’t, the nuances between active and passive are secondary."
One way schemes use passive allocations is to mitigate risk in their active investments. Forbes said: “An investor could just find that they like particular active managers, but on balance they provide a high bias to volatility. They can look to complement that with a low-volatility smart beta strategy."
