The Fundamental Index - Chapter 4: The Index Funds Achilles' Heel
North American stock indexes started off in the red today. The news continues to be deteriorating economic fundamentals in the US. On the flip side, bonds continue to do well. The 10 year Canada is yielding 2.8%. ScotiaCapital has produced an informative report on bonds as well has a list of 5 contrarian stock ideas which are: under-followed; rated sector outperform; non-commodity related; sustainable dividend payers; and reasonably valued. If you'd like a copy, contact us at yourlifeyourplan.ca or call 250-868-5525.
Academic studies have presented strong evidence of mispricing in the market for a variety of anomalies; however, on average, active managers collectively trail the S&P 500 after fees over the long-term by 50 to 200 basis points (or more). The fact that the average active manager cannot win says nothing for or against the notion that skilled active managers can win. The data merely suggest that indexing makes sense if we can't pick good active managers.
In general an index should have the following attributes: it should be representative; it should be replicable; it should be transparent and rules-based; and it should be low turnover. Many of the indexes that are widely followed fall short on one or more of these attributes. The tendency then is for cap-weighted indexes to be dominated by past winners. So how do we separate portfolio weight from price?
Equal weighting the S&P 500 beat the normal S&P 500 by 150 basis points on average from 1990 through 2007, outperforming in both up and down periods. Despite the out-performance, equal weighting isn't perfect and introduces other problems including more turnover and the associated costs; but, it's a step in the right direction.
GB
Academic studies have presented strong evidence of mispricing in the market for a variety of anomalies; however, on average, active managers collectively trail the S&P 500 after fees over the long-term by 50 to 200 basis points (or more). The fact that the average active manager cannot win says nothing for or against the notion that skilled active managers can win. The data merely suggest that indexing makes sense if we can't pick good active managers.
In general an index should have the following attributes: it should be representative; it should be replicable; it should be transparent and rules-based; and it should be low turnover. Many of the indexes that are widely followed fall short on one or more of these attributes. The tendency then is for cap-weighted indexes to be dominated by past winners. So how do we separate portfolio weight from price?
Equal weighting the S&P 500 beat the normal S&P 500 by 150 basis points on average from 1990 through 2007, outperforming in both up and down periods. Despite the out-performance, equal weighting isn't perfect and introduces other problems including more turnover and the associated costs; but, it's a step in the right direction.
GB
posted by Gordon Bell at
9:25 PM
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