(R)evolution In Indexing Methods
What should be considered active?
BY Sponsored by Wegelin Asset Management | April 14, 2011
One of the most hotly contested issues among investors is whether one should invest actively or pas- sively. In the following white paper we study this question in detail, cover the more general issue of what “passive” actually means, and in doing so, by implication indirectly address the issue of what should be considered as “active”.
Traditionally, the term “indexing” has been associated with the weighting of financial investments according to their level of market capitalisation. The arguments favouring market capitalization weighted indexing over other approaches draw on Modern Portfolio Theory and the Efficient Market Hypothesis. In recent years, the superiority of this indexing approach has been increasingly called into question. New indexing approaches such as Enhanced Indexing, Fundamental Indexing and Active Indexing® have emerged and are now increasingly challenging the once firmly established norm. But as of today, market capitalization based indexation remains far and away the most prominent indexing method. Is this approach’s omniprevalence justified? And if not, what are the respective strengths and weaknesses of the different approaches and which conclusions should the sophisticated investor draw? It is these questions – fundamental to most every investor’s portfolio construction – that we attempt to address below. A rigorous analysis of the pros and cons necessitates the provision of a comprehensive overview of each indexing approach’s theoretical basis. Only then is it possible to adequately assess the resulting implications for the investor and to provide an outlook on how the future index investing landscape might be shaped. Download the full paper.