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Investors put faith in active outperformance despite passive shift

Nearly a third of investors have shifted to passive management or smart beta in the last three years according to a new poll of global institutional investors, with 31% of opting for passive and 20% respectively for smart beta.

However, most investors believe active will outperform passive over the next 12 months.

Bfinance’s latest asset owner surcey, which covers 485 investors worldwide managing nearly $8trn (€6.8trn), also found that 66% of respondents had added a new asset class to their portfolio over the past three years and a further 9% planned to do so imminently.

According to the survey, which monitored trends over the past three years, the most popular new assets to include were private debt, infrastructure, real estate, emerging market equity and alternative risk premia.

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David Vafai, chief executive of bfinance, said: “At the heart of this report is a fundamental tension. There is a gulf between the returns that many investors require and the widespread expectations for what a traditional portfolio may be expected to deliver through the coming decades.”

“With investors making substantial changes to improve long-term risk-adjusted returns, the job of the investor CIO is getting harder and successful delivery is becoming increasingly reliant on the quality of implementation decisions,” he said.

Some 49% of investors in the poll increased their allocations to private markets in the last three years, although nearly half of investors are currently underweight versus their allocation target for this asset class, and only 12% are overweight.

Obstacles to investing further included the extended time taken to make appropriate commitments, slower-than-expected capital calls, and lack of appropriate opportunities, the consultancy said.

Peter Hobbs, managing director, private markets, at bfinance, said: “Higher allocations to private markets proved to be one of the key investor trends in the aftermath of the financial crisis. It is interesting to see data from the survey confirming that the trend, far from settling down, has continued strongly through the last three years.”

But Hobbs said that implementation was far from straightforward.

“While allocations might have continued to rise, investors are finding it increasingly difficult to deploy those allocations successfully,” he said.

”With many investors looking to private markets for return enhancement and diversification, it is increasingly critical to look beyond the asset allocation models and get the implementation right,” said Hobbs.

Meanwhile, despite greater use of alternative investments, investors appeared in the survey to have reduced overall costs and the total fees paid to external managers.

Only 27% of investors said their overall costs had increased as a percentage of assets, while 41% said they had decreased.

Meanwhile, 51% of investors are paying less in total external asset management fees versus 17% who have seen fee spend increase. Unexpectedly, investors that have increased allocations to private markets are among the most successful in reducing costs, along with European and Australian asset owners.

Belt-tightening tactics used by investors include fee renegotiation (56%), consolidating mandates with fewer managers (40%) and conducting fee benchmarking studies using external consultants (33%), according to bfinance.

ESG considerations were growing in prominence, according to the survey, with 39% of respondents saying it was “high priority” for their institution, and 43% implementing a new ESG policy either in the last three years or this coming year.

In terms of manager selection, 41% of investors said ESG considerations would play a “major” role in future

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