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Institutional investors losing millions of pounds through under-performing active funds

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Passive funds are not only cheaper than active funds but also perform better on average, net of costs, according to research by fiduciary and multi-asset investment manager Charles Stanley Pan Asset (CSPA).

The findings show that a passive strategy could give large pension schemes an additional GBP3.8m return per year.
 
It was revealed that over five years to the end of April 2014, passive funds in 14 liquid asset classes have outperformed median active funds by 4.73 per cent on average. In one instance, emerging market bonds, this difference was 12 per cent over the five year period.
 
The same analysis to the end of June 2013 produced an outperformance of 6.5 per cent. This additional revenue has been coined the ‘Passive Fund Premium’ which is the return to be expected from a portfolio of passive funds over an equivalent portfolio of active funds.
 
In 2013, CSPA said “The Governance Revolution”, which proposed that UK institutional pension schemes, particularly smaller schemes with c. GBP50m of assets, should consider adopting a 100 per cent passive approach and in doing so could save GBP3m over five years.
 
The latest research, “The Case for a Passive Fund Premium”, focuses on the benefits for larger pension schemes c. GBP500m. CSPA’s findings suggest that if a scheme of this size adopt a passive-only approach to all liquid asset classes, it could save approximately GBP3.8m per year (net of costs), worth GBP19m over five years.
 
Bob Campion, head of institutional business at Charles Stanley Pan Asset, says: “Our latest research provides further support for the argument that passive funds tend to outperform their active counterparts, net of fees, particularly over longer time periods.
 
“We have found that this is true for larger institutional pension schemes just as it is for smaller schemes.
 
“By taking a passive approach to investing in all asset classes, pension funds simplify their investment process, cut costs and should find long-term performance improves. It also puts them in a better position to focus on the investment decision that matters most – asset allocation.”
 
As part of this research CSPA has estimated that the UK’s local government pension schemes could improve performance by GBP441m a year through switching GBP85bn of actively managed investments in listed asset classes to passive strategies. This improvement could be worth GBP28bn over 20 years.

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