Passive investment funds cost less than active ones, and perform better over most time periods, according to research by investment management firm Evercore Pan-Asset (EPA).
The governance revolution paper, which analysed 14 equity, bond and alternative asset classes, showed that the passive funds selected performed better than the median actively-managed fund in all but one case over the past five years.
This performance was repeated over three years, where passive funds performed better in 12 out of the 14 asset classes. Across all asset classes, on average, passive funds out-performed active funds by 6.5% over five years.
For a £50-million pension scheme, this underperformance would mean that an entirely passive portfolio would save £3.6 million compared to a portfolio of median active managers over five years.
The paper proposed that UK defined benefit pension schemes, particularly smaller schemes with less than £250 million of assets, should consider adopting a 100% passive approach, using the time and cost savings this generates to focus greater attention on asset allocation.
This structure, of active asset allocation with passive funds, could represent a significant improvement in investment governance, while also reducing costs.
Bob Campion, institutional business director at Evercore Pan-Asset, said: “We have long been advocates of the passive approach and this research is further evidence of how cost-efficiency can lead to better performance.
“Thanks to recent developments in the market for passive funds, there is no reason why any pension scheme cannot have a highly diversified, highly efficient, low-cost portfolio, irrespective of its size.
“We believe passive portfolios are the way forward. In addition, liquid passive portfolios can be used to great effect, putting trustees firmly in control at a time when more hands-on management of asset allocations is much needed.”