As part of its latest securities lending market report, IHS Markit revealed that passive funds earned 14 percent more than their active peers over the past three years, representing a 0.6 basis point revenue boost.
According to IHS Markit, this may be because passive funds to be more pragmatic in what collateral they will accept for securities lending transactions.
Active funds are nearly twice as likely to accept only the highest quality non cash collateral, and these scruples are affecting their bottom line.
IHS Markit data indicates that 36 percent of active funds will only accept the highest quality G7 bonds as non-cash collateral.
In contrast, 80 percent of passive inventories are available to borrowers with lower quality collateral, such as G10 bonds or equities.
“Much like more parochial niches such as retail, food distribution or even mattresses, the twin siren songs of improved efficiency and lower cost promised by upstart passive funds have proved too much of a temptation for investors to resist,” said the report’s author Simon Colvin.
“Spurred on by the desire to cut costs, and the growing realization that the extra costs levied by incumbent fund managers don’t guarantee outperformance, the steady trickle of inflows into passive funds has now turned into a deluge.”
IHS Markit data revealed that as much as $4.3 billion is now managed by exchange-traded funds globally.
“The even larger sum allocated to passive fund trackers, is now starting to make waves in the securities lending space,” Colvin added.