WRS News Online

Asset Management: Passive vs. Active

Glossary of Terms
Active management - a portfolio management strategy where the manager makes specific investments using analytical research, forecasts and their own judgment and experience with the goal of outperforming similar investments in the market.

Passive management - Also known as "indexing," this is a style of management that attempts to match the results of a basket of investments such as the S&P 500. Passive management strives to equal what the market delivers at a lower cost while active management works to beat the market returns.

Active versus passive. No, it 's not a debate to stir the passions of the public, but in the world of investing and deciding how to generate investment returns, it is a rivalry up there with the Hatfields versus the McCoys or the Packers versus the Bears.

The State of Wisconsin Investment Board has long been considered a low-cost public pension fund manager that provides solid returns for the Wisconsin Retirement System. SWIB is able to manage its costs effectively and provide respectable returns by doing both, combining active and passive management of the trust funds.

Proponents of active investing tout the ability of astute fund managers to beat the market and add "alpha," that amount of outperformance attributable to the skill of the manager. On the flip side, advocates of passive investing point to the long-term inability of most active managers to beat the market; the high fees charged for sub-par performance; and tax inefficiencies. And so the debate goes.

In truth, while the polarized positions speak to different groups of managers battling for fund flows and for the upper hand in a market debate, most investors are best served by a dual approach. Selectively investing with certain active managers can and likely should be combined with positions in targeted passive funds.

"SWIB uses a combination of active and passive management not only to earn above market returns, but also to protect the trust funds from market volatility," David Villa, SWIB chief investment officer said. "The combination has been very important to our investment strategy, especially with the market ups and downs we have experienced recently."

SWIB has always used a mix of both active and passive management. The mix of active and passive management varies by asset class and depends on market efficiencies and management options. Some markets SWIB invests in to help diversify the Core Fund, such as private equity and real estate, do not have passive indexes. By actively managing assets and putting in place those diversification strategies, SWIB is working to stabilize returns, contribution rates and annuity adjustments.

"SWIB actively manages assets not only to earn more than the passive market indexes, but also to do so with the ability to better manage risk," Villa said.

Of the 47% of total assets that SWIB manages passively, approximately 37% are managed internally. The combination of passive and internal management helps keep costs low while earning market returns. CEM Benchmarking found that SWIB is one of the lowest-cost public institutional investors in its peer group.

SWIB's mix of active and passive asset management helps keep the WRS among the best-funded public pension funds in the country.


WRS Asset Management Breakdown

As of December 31, 2015

($ Mil.)

%

Total Internal

$59,900

65%

Active

25,872

28%

Passive

34,028

37%

Total External

$ 32,106

35%

Active

23,226

25%

Passive

8,880

10%

Total WRS

$92,006

100%