Indexing for Maximum Investment Results

by Neuberg,Albert S.

• ISBN13: 9781884964503
• ISBN10: 1884964508
• Edition: 1st
• Format: Hardcover
• Copyright: 2001-02-01
• Publisher: Routledge

Summary

Twenty four years after investment managers decided to implement Standard & Poor's 500 indexing strategy, the verdict is in. The first indexers beat more than 99% of all actively managed stock funds. Over the last ten years, funds based on the S&P 500 out-performed more than 80% of all mutual funds. Today about $450 billion is indexed to the S&P 500, almost 10% of the total market value of all stocks traded in the US. The strategy has been applied to other asset classes, including bonds and real estate. In total, indexing now accounts for more than 25% of the investment methodology of all pension funds in the US. Topics include: choosing a benchmark; overview of the marketplace; using derivatives to index; performance track record versus active management; index methodology and other styles; and index price effects on constituent securities. Albert S. Neubert is director of the Domestic S&P Indexes Unit within the Equity Services Group.

Table of Contents

Preface	ix
Contributors	xv
Why the Case for Indexing Remains Strong	1	(18)
The Intellectual Case for Indexing	1	(2)
The Critique of Indexing	3	(3)
The Indexing Counter-Attack	6	(3)
Evidence of Market Efficiency: The Performance of Professional Investors	9	(6)
Criticism of Too Narrow a Definition of Indexing	15	(2)
References	17	(2)
Benchmarks: Definitions and Methodologies	19	(18)
The First Index Mutual Fund	37	(42)
Introduction	37	(3)
The Beginning	40	(4)
The Introduction of the First Index Fund	44	(2)
The Underwriting of the First Index Fund: 1976	46	(6)
The Early Development of the First Index Fund: 1977-1982	52	(1)
Index Growth Continues: 1983-1986	53	(3)
The March to the $1 Billion Milestone and Beyond: 1987-1990	56	(4)
The Evolution of an Index Strategy: 1991-1993	60	(1)
The Triumph of Indexing: 1994-1996	61	(4)
The Industry Finally Responds	65	(5)
Will The Past Be Prologue to the Future?	70	(5)
Appendix Performance Summary	75	(4)
Optimal Indexing	79	(16)
The Objective	80	(1)
A Digression on Risk Modeling	81	(3)
Techniques for Tracking an Index	84	(1)
Alternatives to Replication	85	(1)
Largest Holdings	86	(1)
Stratified Sampling	87	(1)
Optimization	88	(4)
Empirical Investigation	92	(2)
Conclusion	94	(1)
Bibliography	94	(1)
Enhanced Indexing-Without Enhanced Risk?	95	(24)
The Playing Field	96	(2)
The Yardstick	98	(1)
The Players	99	(1)
Instant Replay	99	(14)
The Wrap-Up	113	(3)
Appendix	116	(3)
Choosing a Benchmark	119	(10)
Active versus Passive Benchmarks	119	(1)
Asset Class Exposure	120	(1)
Index Methodologies	121	(4)
Liquidity	125	(1)
Ownership Restrictions	126	(1)
Derivatives	127	(1)
Investor Goals versus Manager Concerns	128	(1)
The ``S&P Effect'' Has Moved Beyond the S&P Composite	129	(16)
Assets Under Management Are Rising	129	(2)
The Measurement Period Has Changed	131	(1)
Management of the Indexes Causes Some Changes	131	(1)
The S&P Effect Is Well Documented	131	(1)
The Small-Cap S&P Effect Started in 1996	132	(2)
Dropping Into the S&P SmallCap Isn't Necessarily Great for Performance	134	(1)
SmallCap Deletions Arise for Three Major Reasons	135	(1)
Moving to the MidCap Index Gives Stocks a Short-Term Lift	136	(1)
Being Dropped From the Index Isn't the Kiss of Death	136	(1)
The Mid-Cap S&P Effect Seems to Have Peaked	136	(4)
Stocks Coming From the Composite Have Fared Poorly	140	(1)
MidCap Deletions Fit Into Four Categories	141	(1)
The Impact on Deletions Didn't Hit Until 1995	141	(1)
Being Dropped From the MidCap Index Is a Mixed Blessing	142	(1)
The S&P Effect Has Its Place for the Short-Term-Oriented Investor	143	(1)
Reference	143	(2)
The S&P500 is Not Your Father's Index	145	(38)
The ``Market Portfolio''	145	(1)
A Valuation and Performance Standard	146	(1)
How Old is Old?	147	(1)
The S&P500 is Not Market, it's an Evolving Portfolio	148	(1)
Scope of This Study	149	(1)
Indication is No Panacea	150	(1)
The Evolution of the S&P500	150	(4)
Managing the Index Portfolio	154	(1)
Mergers and Acquisitions	155	(2)
Recent Additions	157	(1)
Development of New Indexes	158	(2)
Valuation: The Determining Factors	160	(4)
Dividend Policy	164	(2)
Share Buybacks	166	(1)
Competitive Advantage	166	(1)
Profit Margins: The Law of Diminishing Returns	166	(2)
The Rise in Service Orientation	168	(1)
The Decline of Regulation	168	(1)
Valuation Implications: The Relative Multiple Trap	169	(2)
A New ``Nifty'' 50	171	(1)
A New Paradigm?	171	(12)
Performance Track Record versus Active Management	183	(28)
Introduction	183	(1)
Academic Articles On Indexing	184	(4)
Nonacademic Articles On Index Funds	188	(11)
Data Review	199	(3)
Morningstar Data to December 31, 1996	202	(6)
Conclusions	208	(2)
Summary	210	(1)
Overview of the Equity Index Fund Marketplace	211	(10)
Strength of Index Mutual Fund Market	211	(1)
Domestic Indices	212	(4)
International Indices	216	(1)
Index Fund Availability	217	(4)
Implementing Equity Index Portfolios	221	(16)
Introduction	221	(1)
Purchasing Equities Directly	221	(5)
Trading	226	(5)
Derivative Strategies	231	(4)
Summary	235	(1)
Appendix	235	(1)
References	236	(1)
Adding Value Through Equity Style Management	237	(12)
Why Equity Style Matter	237	(1)
Equity Style Allocation Matches Asset Class Allocation in importance	237	(4)
Capturing Excess Return: Current Fund Composition	241	(4)
What Are the Advantages of Custom Portfolios?	245	(1)
Tactical Versus Dynamic Equity Style Allocation	246	(1)
Conclusion	247	(2)
Using Style Analysis to Build Completeness Funds	249	(12)
Completeness Funds Are Dynamic	256	(5)
Index Shares	261	(16)
Index Shares Mechanics	262	(2)
Creation/Redemption of Index Shares	264	(1)
Secondary Market Trading	265	(2)
Advantages of Index Shares	267	(7)
The Future of Index Shares	274	(2)
Endnotes	276	(1)
References	276	(1)
Fixed-Income Indexing	277	(16)
Introduction	277	(2)
The Dimensionality of the U.S. Bond Market	279	(1)
Stratified Sampling	280	(1)
Optimization	280	(2)
Tracking Error	282	(3)
Rebalancing	285	(1)
Pitfalls for Indexers	285	(2)
Enhanced Indexing	287	(1)
Indexing to International Fixed-Income Benchmarks	288	(1)
Does Indexing to Broad Capitalization Indexes Make Sense?	289	(4)
Summary	293	(1)
The Tax Advantages of Indexing	293	(14)
The Impact of Taxes on Investment Returns	293	(3)
Investment Activity Determines Tax Liabilities	296	(6)
Tax Advantages of Popular Index Strategies	302	(5)
Optimizing Performance	307	(30)
The Difficulty of Matching an Index Return	308	(1)
Maximizing an Index Fund	309	(1)
Adding to the Fund's Returns	310	(14)
Trading and Transaction Costs Management	324	(9)
Putting It Ail Together to Maximize Return	333	(2)
Appendix	335	(2)
The Licensing of Financial Indexes: Implications for the Development of New Index-Linked Investment Products	337	(22)
Introduction	337	(2)
Licensing Agreements Between Index Producers and Developers of Index-Linked Products	339	(8)
Financial Indexes as Intellectual Property: Past and Present	347	(6)
The Current Scope of Intellectual Property Legal Protections	353	(4)
Conclusion	357	(2)
Index	359