Video transcript:
This is Fred Barstein, I am the editor in chief of 401kTV and I’m here today with Ralph Haberli of BlackRock. He is Head of 401k Defined Contribution Distribution. Welcome Ralph.
<Ralph Haberli>
Thank you Fred, Good to be here.
We’re here to talk a little bit about Active vs. Indexing in the investment world. Before we start, can you describe what the difference is between actively managed funds and index funds?
<Ralph Haberli>
Well Fred, at the most basic level an index fund is really trying to hit a benchmark. Track that benchmark very precisely, and deliver exactly that investment outcome. An active fund will try to hit that benchmark and add a little bit of outperformance by adding some skill, picking some stocks, picking some bonds, and generating additional performance over time. So index will try to hug a benchmark, while active will try to beat a benchmark.
Indexing is growing dramatically. I think in the last few years, there’s $500 Billion more going into indexing. 25% of Defined Contribution assets are in indexing vs. 17% globally, and 42% of Target Dates are using some sort of indexing now vs. 3% in 2003 – so how do you explain this? What’s going on?
<Ralph Haberli>
Well it’s interesting – at BlackRock we have both a very large active business and a very large index business and really have seen both sides of this trend which gives an interesting position – we really have no horse in the race. And certainly we’ve seen a lot of dollars float to the indexing side. Clients certainly like the predictability and the value they get in terms of being lower cost and flexible. It fits very nicely into a 401k plan structure. We think it sits quite comfortably side by side with active strategy but certainly there’s an opportunity for more and more index to come through.
We’ve heard that it also helps them to manage their fiduciary responsibility within indexing – how does that work?
<Ralph Haberli>
It’s a very simple contract you have with your asset manager when it comes to index. You’re asking them to hit a benchmark – let’s say it’s the S&P 500 – and at the end of the year it’s very clear whether they have done that or did not do that. As someone who’s managing a 401k plan, who’s responsible for those assets, it gives you a lot of comfort that for that part of the plan.
So what we see in our TPSU programs a lot – plan sponsors are asking “should I go all indexing?” – when should a plan sponsor or employer look at using active vs. using index funds?
<Ralph Haberli>
This really gets down to one of the core responsibilities you have as a manager of a plan. And the core question I think everyone should ask themselves, and all good plan sponsors do, is what is the objective of the plan? What are they trying to accomplish? And once you set that objective, you can take the next step and ask what are the vehicles at my disposal to meet that objective? Typically plan sponsors are looking to be efficient, so have fees in the mix, but there’s also other factors they’re looking at in terms of being able to navigate to certain outcomes, and that’s really what starts to lead you towards active or passive. There are certain asset classes where people may have lower confidence that active managers can outperform. There may be areas where you can get very efficient – certain equity asset classes tend to fall in that category. Where in other areas, notably fixed income, there’s more of a view in the marketplace that an active manager can really outperform those benchmarks. Now those are generalizations, there are certainly going to be objectives that would take you towards all active or more of an index skew, but that really comes down to the plan sponsor navigating that. Again, we’re in an interesting position as BlackRock in that we have both vehicles. As we engage with our clients, we’re helping them through that tradeoff and certainly we’ll end up in an active situation in certain situations and passive in others.
So, are all indexers the same? They’re all trying to hit the same benchmarks and know what that is, so what differentiates one from another?
<Ralph Haberli>
Well Fred, a lot of people out in the marketplace tend to refer to index as passive. And we at BlackRock, we’re the world’s largest indexer, think that indexing is anything but passive. There’s actually quite a lot going on. Yes fees are low and it’s a fairly straightforward process, but under the hood there’s a lot going on. Scale really matters, being efficient in how you implement. How you manage towards the S&P 500 takes quite a bit more skill than people think. Over time, you will see that certain managers will actually outperform even in the passive index vehicle by small fractions of percentages. That comes down to scale, efficient trading, and the ability to implement a solution in a world class fashion. So again, we don’t think indexing is passive. There’s actually quite a lot there going on.
Thanks Ralph for your comments today and thanks for watching 401kTV. We’ll see you soon.
The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this video are derived from proprietary and non-proprietary sources deemed by BlackRock, Inc. and/or its subsidiaries (together, “BlackRock”) to be reliable. No representation is made that this information is accurate or complete. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this video is at the sole discretion of the reader.
This video does not constitute a recommendation by BlackRock, or an offer to sell, or a solicitation of any offer to buy or sell any securities, product or service. The information is not intended to provide investment advice. BlackRock does not guarantee the suitability or potential value of any particular investment.
©2016 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
DCM-XXXX
