Passive equity products, especially exchange-traded funds (ETFs), are gaining appeal at some of Korean public pension funds just as actively managed equity funds lose theirs.
Speaking at AsianInvestor’s 13th Institutional Investment Forum Korea in Seoul earlier this month, the chief investment officers of the Government Employees Pension Service (GEPS) and Public Officials Benefit Association (Poba) said they were struggling to find active funds anywhere offering good value.
Lee Chang-hoon, GEPS's CIO was notably sceptical.
“I don’t think that active managers are actually active; they are not creating alpha. And there is not much difference between these active managers in terms of performance,” Lee said from the stage.
Alpha is the extra return over and above the benchmark market return, or beta, that active fund managers are supposed to deliver for their investors in return their management fees.
As at the end of 2017, GEPS had assets under management (AUM) of W80.5 trillion ($70 billion). Of this, 34% was allocated to stocks. This is the most recent data available on the GEPS website.
“I want our managers to be really active but the pension funds talk about objectiveness and more quantified assessment,” Lee said. “That is why we always choose large managers like Samsung or Mirae; because of these criteria that we all go by.”
Samsung Asset Management and Mirae Asset Global Investments are two of the biggest fund firms in South Korea.
“But when we look at the performance we wonder why we chose the active managers,” he added. “We could have just done the index or the ETFs.”
Data provider Morningstar last year did a study covering 9,400 Europe-based active and passive funds with €2.9 trillion ($3.25 trillion) in total assets. It found that fewer than a quarter of active managers outperformed their passive counterparts over 10 years between June 2008 to June 2018 in more than half of the fund categories examined.
An ETF is a basket of securities that tracks an underlying index and can be bought and sold on an exchange. ETFs can contain all types of investments including stocks, commodities, or bonds.
On the sidelines of the forum, Lee’s assessment of active equity managers resonated with Jang Dong-hun, the CIO of Poba, whose AUM amounted to W12.9 trillion at end-2018. About 60-70% of its equity investments are in passive strategies.
“I always ask my investment staff about why we need external managers for index funds. Our approach is that if we can find performing managers with track records, then the fees are worth it,” Jang said.
He acknowledged that public equity can be a challenging asset class for creating alpha. However, that is exactly why external managers are employed in the first place, even as Korea's pensions look to improve their in-house investment capabilities – to deliver that little extra something.
“After a hard 2018 equity markets have recovered to some extent, but it is difficult to find the value of actively managed equity funds right now. Therefore, we are increasing our allocation to ETF and other passive index products for our long-term equities strategy,” Jang said.
FIXED INCOME TOO
It's not just with equities either. From the stage, GEPS’s Lee also called out global fixed income managers and declared himself “really disappointed” with their performance in 2018.
Everybody believed credit spreads could not stay low forever from late 2017 through early 2018. But as they began to widen before narrowing again, few fixed income managers seized the opportunity to rebalance their portfolios, Lee said.
“Why do we pay all these fees to these asset managers to manage fixed income when they were not doing this rebalancing,” Lee asked rhetorically.
As such, he said, 2019 would mark a shift for GEPS towards ETFs, starting with the appointment of three global ETF managers.
“Active management is valuable if asset managers outperform the market and have a good risk-adjusted return. If they can’t deliver that performance, then more and more asset owners will consider whether they should choose active managers or not.”
ETF fees, after all, are generally lower.
That shift to more passive equities investing comes at a time when GEPS is also increasingly turning to hedge funds and other alternatives.