The great debate: when it comes to investing pension plan assets, choosing between active and passive management styles is an eternal struggle

• Published in: Benefits Canada Vol. 23; no. 1; p. 21
• Main Authors: Veillette, Rene, Reda, Sam
• Format: Magazine Article
• Language: English
• Published: Montreal Groupe Contex Inc 01.01.1999
• Subjects: Equity; Investments; Management; Pension funds; Volatility
• ISSN: 0703-7732

In Canada, the variety of ways in which the active/passive debate plays itself out are as varied and diverse as the asset classes themselves. For starters, BENEFITS CANADA'S 1998 survey of the Top 100 pension funds determined that some $35 billion in Canadian equities is passively managed, compared to $78.5 billion actively managed. When it comes to U.S. equities, however, Canada's largest pension funds have almost as much money managed on the passive side as on the active side: $14.7 billion versus $16.9 billion, respectively. What's more, a recent survey by Greenwich Associates revealed a trend towards passive management in virtually all asset classes, most notably in Canadian bonds. The research and consulting firm surveyed 305 of the largest Canadian plan sponsors and endowments from 1993 to 1998, and found that the number of sponsors using Canadian equity index management had nearly tripled, from 8% to 21%. Over that same time-frame, the use of passively managed bonds rose from 2% to 17%, while the use of passive U.S. equities climbed from 9% to 19%. For international equities the use was 11% in 1998. In many schools of thought, active management is the most proactive way to ensure the best possible return on investment. However, it is difficult to dispute that, in these cases, passive management produces positive outcomes. And, given the results for U.S. equities, it is increasingly hard to justify fees that are typically in the range of 0.29% for a $50-million fund, compared with about 0.1% for passive management of a U.S. portfolio. Before sponsors start to see passive stars in their eyes, the case for active management in certain asset classes can be just as convincing. When looking at international equity manager's returns, the results are far more palatable for advocates of active management (see "Tallying the results," page 23). Here, there is some significant value-added by the median manager, 1.6% better than the EAFE over five years and 0.9% better over eight years, before fees. The results are even more impressive for first-quartile managers, who outperformed the EAFE by 2.9% over five years and 2.1% over eight years. Even taking into account the hefty marginal cost of active management in the international equities class--typically 0.43% more than passive fees on a $50-million portfolio--active management paid dividends in terms of added value. The median international equities manager generated a net added value of 1.17% over five years. First-quartile managers generated net added value of 2.47% over the same period.