Perhaps the biggest shift taking place in the investment management industry today is the broad migration of assets from active management to passive investing. We see this shift in a variety of pockets of the capital markets. As just one simple barometer, indexed mutual fund assets (equity, bonds and hybrid funds) increased by a compound annual growth rate of 19% from 2013 through 20151. Within defined contribution plans, participants have focused their asset allocations on index funds while sponsors have evaluated index-based target date funds as alternatives to actively managed strategies. Likewise, many defined benefit plan sponsors have abandoned alternative assets such as hedge funds and private equity for indexed approaches while some hedge fund managers have thrown in the towel and closed their active strategies.
What does this trend mean for stable value portfolios within defined contribution plans?
For years, investors have debated the ability for active managers to generate alpha beyond the return of their benchmark. One side says the higher expense of active management is justified as a fair tradeoff for greater returns and benchmark outperformance. The other side is convinced that while active management may produce alpha in particular sectors and/or over certain time periods, simply buying the index is a better long-term strategy for minimizing costs and maximizing diversification. Historically, few stable value managers have considered an indexed approach to the underlying investment strategy in their funds. Given the shift toward indexing today—should they?