Moving on from index trackers – Dutch discover factor investing

The merits of index-trackers as cheap tools for tactical and strategic asset allocation are widely acknowledged in The Netherlands. However, institutional investors are leading a change. They are looking beyond smart beta, and see active factor-based strategies as the cornerstone of their equity allocation.

More than eight in 10 Dutch fund buyers use index-tracking products, according to our most recent research data. About a third want to increase their allocation in the next 12 months. Both figures are significantly above the pan-European average, suggesting passive investing has gained a relatively strong foothold in the country.  

Apart from costs, flexibility is an important reason for Dutch investors to buy index trackers. “Just before the market correction at the end of August, we had significantly reduced our equity exposure,” says Jaap Bouma, a senior portfolio manager at Optimix, a private wealth manager headquartered in Amsterdam. The company currently has 20.5% of its total portfolio invested through index trackers.

“When valuations looked better, we increased our equity allocation again, and did that mainly through ETFs. We play our tactical allocation calls only through ETFs, and aim to hold an active fund for a minimum of 12 months.” Index trackers are set to play an ever more important role in the company’s investment process. “Our tactical investment horizon has been shortening. It used to be six months, but now it’s closer to three,” Bouma says.

Rico Bosma, a fund analyst at Wealth Management Partners, is also an active user of index trackers. “On the equity side, ETFs are an integral part of our selection process,” he explains. “When we want to invest in a particular asset class, we first check whether passive or active funds do better. Consequently, we have a lot of Vanguard funds in US equity, and mainly active managers in EM and Europe.”

On the fixed income side, Bosma has largely sworn off the use of active funds. “Yields are so low in fixed income, that we have completely switched to index trackers for investment-grade credit and government bonds,” he says. “Only for high yield and emerging market debt we still use active funds.”

Part of the Mark Allen Group.