Investors favour blending active management with indexing, says iShares study

The approach of blending active management with indexing is gaining favour with investment professionals, who no longer believe it is a question of active versus passive.

A study published by iShares, the BlackRock ETF platform, has identified client demand, cost, market dynamics and regulation as the key catalysts that have driven changes in the industry so far and are likely to accelerate the pace of blending in the future. 

The study polled the views of 35 European businesses with combined assets under management of €2.4trn from across the wealth, discretionary and advisory market. iShares said the study aimed to identify “how investment professionals are approaching the question of whether and how to blend active management and indexing”. The study also examined the major catalysts and obstacles to blending active and index products. 

The study identified three main professional investor identities. The largest group is comprised of ‘Agnostic Allocators’ (45% of total respondents), who consider asset allocation as the key driver and the investment vehicle (whether active or index) a secondary concern.

The ‘Actively Active’ investor (30%) is focused on generating alpha for clients through stock selection with a high level of conviction in active management.

The third group, ‘Embracing Blending’ (25%), is adopting indexing for tactical exposure and moving towards a comprehensive approach to blending.

Stephen Cohen, head of Investment Strategies and Insights for iShares (EMEA), said: “Indexing, through index mutual funds or ETFs, now accounts for over 11% of assets under management in Europe. This growth has contributed to the increased combination of active management and indexing within blending investment strategies.

“Our findings, however, show there is no single answer to blending. While asset class efficiency was identified as the most common starting point for blending decisions, there are many factors driving current practice, in particular investment philosophy, client demand and the market cycle.”

David Gardner, head of sales at iShares (EMEA), said: “Our clients often ask us how they can use active and index funds together in their portfolios, and unsurprisingly, how their peers are using them too. This deep qualitative research was undertaken to allow investors to identify not only where on the blending scale they currently sit, but where they need to be in the future to maintain a competitive edge.

“The conversation has long since moved on from ‘active vs passive’,” Gardner added. “It is now a question as to what extent investors are incorporating both styles into their portfolios and the drivers that have brought this shift on. As a fiduciary to our clients, we hope to use our research and expertise as a guide on the potential opportunities that blending index and active instruments can present.”

On September 30, 2012, BlackRock’s AUM was $3.67trn. iShares has more than 600 funds, trading on 20 exchanges around the world. 


 

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