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Monday, June 22, 2009

Big Investors Run to Indexing

News summary by MFWire's editors

Mutual fund firms and other asset managers that cater to the pension, foundation and endowment market are waking up to some stressful news Monday morning -- more of these investors are favoring passive portfolios rather than active ones. The findings of a recent Greenwich Associates survey is picked up in Monday's Wall Street Journal.

The Greenwich, Connecticut-based Greenwich Associates, found that one in five institutional investors has recently shifted assets to passive managers from active ones. In a similar survey in last year's third quarter, just four percent of institutional investors said that they were contemplating such a move.

So what happened to change their minds? The paper points to the relative underperformance of active managers during the fall and winter market meltdown. That underperformance left institutional investors wondering what they are getting for their extra fees, the paper posits.

For fund firms, the shift may lead to increasing competition. Pension funds have been trimming the number of managers used in their portfolios for a number of years, and a shift to passive portfolios would only exacerbate this trend. The dwindling opportunity to win pension assets would potentially force those managers to look at retail investors -- especially in the high net worth market -- and at the still growing defined contribution plan market.

In the retail fund market, a growth in passive investing would further pressure smaller fund shops. Indexing is a scale game and few asset managers can compete effectively. Indeed, the paper reports that the shift is one reason why BlackRock CEO Larry Fink pulled the trigger on the Barclays Global Investors deal. 

Edited by: Sean Hanna, Editor in Chief

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