Pension trustees should reconsider the inclusion of active equity investment because of its potential to deliver exceptional returns, says Hewitt Associates.

The global human resources consulting and outsourcing company believes there is a strong case for halting the move towards passive funds, and that excess net returns of three per cent a year from active investing would amount over ten years to deliver an additional 34.4 per cent in asset growth.

Lennox Hartman, head of Hewitt's manager research team in the UK, said: "Active fund managers have emerged from their worst year for a generation. Investors' confidence in their abilities has been severely tested.

"Falling asset values and under-performance from many active managers have dealt pension funds a double blow leading trustees to reconsider not just their allocation to equities, but also the merits of active over passive investing. However, the opportunities currently available to active managers are arguably greater than usual. At Hewitt, we firmly believe that it is possible to identify a group of actively managed funds which have the ability to perform better, on average, than the benchmark and to achieve material returns."

Mark Howdle, UK head of equity manager research at Hewitt Associates, added: "The second half of last year was exceptionally difficult for active managers, as share prices were less driven by fundamental factors than usual. Market declines were sharp and indiscriminate, but equity markets appear to be inefficient enough to provide skilful managers with opportunities to generate some excess return. While market recovery will ease the troubles of pension funds, it will not solve them in isolation. Even a small active return compounds significantly over time."

Howdle said Hewitt would now argue that it is time to take care in selecting the active managers that are most likely to produce superior returns, while at the same time mitigating market risk. "Those who judge active management on the basis of an unprecedented period, may regret the missed opportunity in years to come."

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