Index funds are useful tools for the active management of SEB’s pension assets

Index funds have their advantages, but actively managed funds should not be discarded completely in the management of pension assets. It is wise to use index funds in the management of pension assets to balance risks.

An index fund is comparable to a plane flying on autopilot. The portfolio of a fund like this is compiled by copying a stock market index – the most popular being large stock market indexes like S&P 500, MSCI World, etc. A manager of an index fund does not bother themselves with thinking whether share A is better than share B or whether share C should be sold from the portfolio as the future prospects of the company have deteriorated. The advantage of index funds lies in their lower management fees, but a low fee does not always grant the best result. A better result is reflected, for example, in a better risk-weighted rate of return.

SEB’s pension funds use index funds for investments

Active and passive funds are becoming increasingly entwined – on one side, passive funds are used by the managers of active funds in their portfolios and, on the other, so-called semi-active index funds have appeared on the market. For example, as of May, the SEB Progressive Pension Funds had 9% of its portfolio in various index funds of shares and bonds.

We are more active in the selection of bonds in locations nearer to us and use passive index funds in more remote areas or global investments to manage the risks. As the price of index funds changes in real time, they are effective tools to add or lower risks – instead of trading with hundreds of securities, it is possible to change the positions quickly by buying or selling index funds.

However, the composition of our portfolios as a whole does not copy the market index. We change the ratios of the different asset classes and areas in the portfolio actively – we buy, for example, an index fund of European bonds and sell an index fund of US shares. We use passive index funds as tools in the active management of the portfolio. When we see troubles ahead for the global economy or financial markets, we do not sit and wait like the passive index funds, but reduce the risk by selling shares or share funds (including passive index funds). When we see good investment opportunities, for example, in the bonds of the Estonian company Elering, we do not pass it up only because the market index does not include them.

Good to know! Index funds can be distinguished in the monthly investment reports by the letter combination “ETF” in their names. The largest index fund providers in the world are BlackRock iShares, Vanguard, State Street Global Advisors' SPDR and Deutsche Bank AWM X-trackers.

Endriko Võrklaev
fund manager