Investors Switching to Index Funds – Big Time

by Jason Unger

As investors come to realize that active fund management often underperforms passive strategies, they’re switching to index funds — in droves.

More than 20% of U.S. institutional investors have moved money from active management and into index funds, according to a recent survey by Greenwich Associates.

While the consulting firm says it’s “not yet clear” if this is a long-term move or just a “parking” of assets, only 4% of those investors expected to change their philosophy, according to the Wall Street Journal.

Bill Atwood, executive director of the $9 billion Illinois State Board of Investment, tells the WSJ: “Active managers have not given us the added performance in a down market that we hoped for. Now that we think we’re close to the bottom, we feel we can access the upside just as well with index managers.

The Journal takes a look at what would happen to asset managers, should this trend continue.

The active-versus-passive debate is shaping up as a driving force behind industry consolidation. When BlackRock Inc. agreed this month to acquire Barclays PLC’s Barclays Global Investors, the giant index and exchange-traded-fund business, BlackRock CEO Laurence Fink cited investor efforts to cut costs through passive strategies as an impetus for the deal.

“For big money-management houses that underperformed, this trend is bad news,” says Mark Keleher, chief executive of Mellon Transition Management, which helps investors switch managers.

Thanks in large part to a growing preference for index funds, the Bank of New York Mellon Corp. unit is forecasting a record number of asset managers will be replaced in the second half of this year.

Studies have consistently proven that index fund investing outperforms nearly every actively managed fund. And as fund managers are unable to justify their fees, they’re beginning to offer even worse advice: ditching the time-tested strategy of buy-and-hold.

Sounds to me like they’re clawing to retain any relevancy they can.

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